What Is a Linear Price Scale?
A linear (arithmetic) price scale is a charting scale used by traders that is plotted with real values spaced equidistant from one another on the vertical y-axis. Each unit change is represented by the same vertical distance on the chart, regardless of what price level the asset is at when the change occurs.
A linear scale can be compared with a logarithmic scale. The interpretation of a stock chart can vary among different traders depending on the type of price scale used when viewing the data.
- Linear price scales—also referred to as arithmetic—represent an asset's price on the y-axis using equidistant spacing between price marks.
- A linear price scale chart displays changes in absolute terms and does not depict price movements in relation to their percent change.
- A logarithmic price scale chart, on the other hand, is plotted to show the percentage change that occurs when a price moves from one quote to the next so that each price mark is larger by a factor of ten.
How Linear Price Scales Work
Linear price scales and logarithmic (log) price scales are two common types of charts used in the financial industry. Both types of charts can be used by technical analysts. Each of the charts is typically generated from software automation. Linear price scale charts can more easily be drawn manually since they rely on static units representative of absolute values.
Logarithmic charts typically require the use of advanced chart programming since their unit value movements are not constant but rather expressed in percentages. Both linear and logarithmic charts will use the same x-axis dates for their charting.
A linear price scale can also be known as an arithmetic chart. The linear price scale chart doesn't depict or scale movements in any relation to their percent change. The linear price scale plots price level changes with each unit change corresponding to a constant unit value. Since each value change on the grid is constant, linear price scales can more easily be drawn manually.
Example of a Linear Price Scale
A linear price scale is easy to identify because the vertical axis will always be charted with values equidistant apart.
For example, a linear scale disregards the fact that a $5 move is more substantial when the price of an asset is $10 than when the price of the asset is $50. The price movement that is plotted on the chart is represented as being the same distance on the scale, even though a $5 increase from $10 is equal to a 50% increase, while a $5 increase from $50 is a 10% increase.
Logarithmic Price Scales and Charting
A logarithmic price scale chart is plotted to show the percentage change that occurs when a price moves from one quote to the next. They chart the price’s percentage move by mathematically portraying it in the vertical movement.
Therefore, if a price increases by 1%, its higher vertical movement will be much less than a vertical movement depicting the price change of a 50% increase. To allow for mathematically scaled price movements per unit change, advanced charting software creates a non-static vertical axis. In a logarithmic price scale, the vertical y-axis changes its scale with each price movement.
A linear and logarithmic price scale chart will have the same visual appearance in the body of the chart. However, a logarithmic chart will have an adjustable vertical y-axis that can more clearly show breakout levels at which a price has made large percentage moves. If price changes are occurring in low percentages then a logarithmic price chart will also depict that with concentrated price levels on the y-axis rather than large spaces shown between prices.
While the difference between linear and logarithmic price scales is important to understand when reading charts, there are other forms of technical analysis that you can use to identify and capitalize on price trends.