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Why I’m increasingly using log-scale charts
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One little-discussed aspect of charting is the question of whether to use logarithmic or arithmetic scale charts. Often investors just take what their charting package gives them without realising the differences and the impact it could have on their stock analysis.

Below I’ll look at what is the best method to use and ask some well-known traders which one they incorporate.

Basically logarithmic-scale charts plot changes on the vertical axis (or Y axis) in terms of percentage change. A change from $1 to $2 is a 100 per cent change so would appear exactly the same as a change from $50 to $100. (Most charts are technically semi-log charts because time is still shown arithmetically, but for convenience I’ll call them log-scale).

Arithmetic-scale charts measure changes in terms of dollars. So in the example above, the change from $50 to $100 would appear much larger on the chart because it is a change of $50 as opposed to just $1. Or put another way, a change from $1 to $2 (a 100 per cent change) would appear the same as a change from $14 to $15 (a 7 per cent change) because they’re both $1 changes.

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The example below shows Google shares represented by a log-scale chart. Looking at the Y-axis you can see the values seem to compress as they rise from 0 to 450. The trendline has been clearly drawn and has been broken at the start of the year. This indicates the stock is decelerating because the rate of percentage changes is falling.


The chart below is a normal or arithmetic-scale chart. Note the Y-axis values are equal distance apart. You can also see how the trendline appears much differently from the chart above. It is often necessary to keep re-drawing trendlines (as I have done) on artithmetic charts, which can make the bigger picture difficult to analyse.


Personally I use the Dow Theory definition of a trend based on peaks and troughs. Because of that, trendlines are not crucial. A stock could have broken a trendline but still be making higher peaks and troughs, as in the chart below.


What trendlines actually show is the rate of change of a trend, not the actual trend itself. In the example above, the trend is still up but the trendline break means the trend is slowing down.

That said, I have been increasingly incorporating trendlines into my analysis.

Firstly because I want to buy stocks that are accelerating, or at least maintaining the pace of their rise. I don’t want to be sitting in stocks that will go sideways for ages. If we look again at the Google examples above, the first chart clearly shows the trend is slowing. The second arithmetic-scale chart does not reflect this clearly (the stock broke the second trendline but is still trading above the first trendline).

The second reason (which is linked to the first) is that a break of trendline can be a warning sign that a trend is about to end. An example is the 1-2-3 trend reversal written about by Trader Vic.

The final reason is that because so many people use them, it is important to note where trendlines may create support or resistance.

Because I have incorporated trendlines into my analysis I am increasingly using log-scale charts because they more accurately reflect a stock’s acceleration or deceleration. I also analyse stocks on a weekly basis, and over a longer time frame log-scale charts give a more accurate picture.

One danger I found with arithmetic charts is it often looks like the trend has accelerated uncontrollably (parabolic) and is moving towards a climax top. In the past I have skipped good trades because of that. The log-scale charts would have shown me the trend in a much more sensible light.

But on a shorter time frame, log-scale charts are not necessary.

I asked a number of leading traders what they use:

Charles Kirk said: “Telechart enables you to switch between the two “on the fly” so I use both fairly often. If I had to say a preference, it would be toward arithmetic because they are more useful in short-term trading.”

Dr Wish uses “semi-log because I want equal percentage moves to show up as representing the same height on the graph.”

Dave from StockTickr said: “Since I’ve started trading on a much shorter timeframe I’ve started using arithmetic charts. For longer term trading I’d glance at both but I’d mostly go off logarithmic charts.”

So basically for the short term using arithmetic charts is fine. But for those looking at longer time frames, log-scale charts can be useful particularly if you want to use trendlines.

Like Charles Kirk I’ve started looking at both.