A logarithmic price scale, often known as a “log scale,” represents two equivalent percentage changes in price by the same vertical distance on the chart. This scale is particularly favored for its ability to normalize the scale of price movements over a range of values.
Key Insights
- Normalization of Price Movements: Logarithmic price scales depict two equivalent percentage changes as equal vertical shifts on the chart.
- Ideal for Long-Term View: These scales are especially useful for long-term analysis of price changes.
- Percentage Over Dollar: Unlike linear scales, log scales highlight percentage changes over absolute dollar increases.
Unravelling Logarithmic Price Scales
As the price of an asset increases, the distance between numbers on a logarithmic scale diminishes. A $1.00 price increase has a reduced percentage impact at higher price levels, a characteristic captured perfectly by log scales. The alternative, known as a linear price scale, treats price increments uniformly without factoring in percentage change.
Logarithmic price scales have become the standard for most charting utilities, preferred by technical analysts and traders. They present common percentage changes as equidistant points on the scale. For instance, the jump from $10 to $20 is represented equally to the jump from $20 to $40 since both are 100% increases.
Unlike linear scales, logarithmic scales effectively represent this relationship. Linear scales provide a static interval portrayal appropriate for less volatile assets, allowing a clear analysis of potential buy/sell points—but often demanding larger screen real estate for comprehensive price visibility.
Example of a Logarithmic Price Scale
Below is an illustrative example using a chart of NVIDIA Corp.:
In the chart, the separation between $20.00 and $40.00 is noticeably broader than that between $100.00 and $120.00, despite both increments being $20.00. This visually demonstrates how the log scale accounts for varying percentage increases—for example, a move from $20 to $40 represents a 100% increase, compared to just 20% from $100 to $120.
Related Terms: asset, linear price scale, technical analyst, volatility, profit target.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is a logarithmic price scale?
- [x] A scale used on a chart where two equivalent price moves are spaced proportionally
- [ ] A scale used to measure economic growth
- [ ] A scale that measures volatility in the market
- [ ] A scale where price movements are depicted linearly
## When is a logarithmic price scale typically used?
- [ ] For short-term price movements
- [x] For analyzing long-term price movements
- [ ] For intra-day trading
- [ ] For calculating simple moving averages
## In a logarithmic price scale, what will the space between $10 and $20 be compared to the space between $100 and $200?
- [x] They will be equal in a percentage change
- [ ] The space between $10 and $20 will be larger
- [ ] The space between $10 and $20 will be smaller
- [ ] The space between $100 and $200 will be twice as large
## What type of charts often use logarithmic price scales?
- [ ] Candlestick charts
- [x] Long-term price trend charts
- [ ] Point and figure charts
- [ ] Renko charts
## Why might an investor choose a logarithmic price scale over a linear price scale?
- [ ] To track small price fluctuations more closely
- [x] To have a better understanding of percentage movements
- [ ] To see raw price changes directly
- [ ] To avoid complex calculations
## How do logarithmic price scales display equal spacing?
- [x] By evenly spacing out points based on percentage increases
- [ ] By evenly spacing out points based on absolute price increases
- [ ] By spacing points based on volume traded
- [ ] By adjusting for inflation
## For which market condition are logarithmic price scales not particularly useful?
- [ ] During highly volatile markets
- [ ] In the analysis of rapid price movements
- [x] For analyzing small, short-term price changes
- [ ] For studying diminishing returns epidales
## What do logarithmic price scales help to avoid in price analysis?
- [ ] The impact of trading volume on the price
- [ ] Recording incorrect data points
- [ ] Over-emphasizing large price changes over time
- [ ] Over-emphasizing technical indicators
## Which of the following is an example where logarithmic pricing could be more appropriate?
- [ ] A stock moving from $100 to $110 versus $110 to $120
- [x] A stock moving from $10 to $100 versus $100 to $1000
- [ ] Weekly price patterns over a month
- [ ] Daily opening and closing prices
## What kind of stock price movements can be more challenging for logarithmic scales?
- [x] Minimal, short-term fluctuations
- [ ] High magnitude percentage changes
- [ ] Exponential growth trends
- [ ] Patterns during rapid market shifts
