Linear vs. Log charts - When to use each?

[Whiskers]

I'm a relative novice to investing/tradeing charting and am sometimes confronted with the problem of which to use.

Generally I use linear as most of my charting is short term.

It seems to me that the dollar and percentage numbers are the same whichever you use, but there can be a significant difference in charting trendlines over time.

What are the pro's and con's of linear and log charting?

When should each be used and why?

What do people use?

 

[tcoates]

Re: Linear v Log charts - When to use each.

I could write an explanation but what I would say is perfectly written here....

http://www.fool.com/foolfaq/foolfaqcharts.htm

and

http://www.incrediblecharts.com/technical/trendlines.htm

I use linear charts mostly due to the timeframe that I am looking at.

Tim

 

[GreatPig]

Re: Linear v Log charts - When to use each.

I think log is more useful over larger price moves, and for small price moves there's little difference between the two.

So I always use log. Saves switching between them all the time.

GP

 

[Whiskers]

Re: Linear v Log charts - When to use each.

Thanks for that tim.

I understand the basic mechanics, (as quoted from Incredible Charts) but the author is not decisive either.

I am starting to think I should do the same as you GreatPig.

By way of example the XAO is currently close to the long term trend on the log but can fall back to the Aug lows and still be on the linear trendline.

POG is another case in question. It has about reached the linear peaks trend line but still short of the log scale line.

Log or Normal Scale?
There has been much debate on the Chart Forum over the years as to whether trendlines should be drawn on log scale or normal scale charts.

The case for log scale has been summarized by Alsoran as:

Brokers and analysts chart in log mode. They advise institutional clients whose order flow has a marked impact on price action and trend. Their advice is heavily influenced by breaks and refusals of price at key trendlines and channels. These are based on logarithmic charts. Logarithmic trendlines are, therefore, more important.

The case for normal scale (linear) trendlines:

Most trading authors use linear charts: Stan Weinstein, Alexander Elder, Chris Tate and Daryl Guppy.
It is questionable whether most analysts and brokers use log scale charts. Many trading authors (including Stan Weinstein and Chris Tate) are former analysts or brokers and use linear charts.
In my opinion the two sides are talking about different time frames!

Normal Scale
Normal scale charts compare price against time. You would graph the speed of a car in a similar manner: distance (y) over time (x). If a car travels at a constant velocity, the graph will be a straight line. If stopped, the line will be horizontal. If accelerating, the graph will show a curve.

Log Scale
Log charts are not designed to measure velocity, they measure acceleration: the rate of growth in stock prices. A constant velocity will be depicted as a flattening curve; a constant rate of growth (acceleration) will be depicted as a straight line.

Short Term
In the short/medium term we focus on velocity: "Is this week's price increase as good as last week? The time period is too short to be concerned with compound growth rates.

Long Term
Most institutions hold stocks for the long-term and do not concern themselves with short-term fluctuations. They want to know the annual compound growth rate; a very different concept from short-term velocity.

What Chart Scale Should I Use?
On short-term and medium-term charts (3 years or less) we recommend that you use normal scale. For long-term charts (more than 3 years), use either normal scale (linear) or log charts, but be aware of their respective strengths and weaknesses. Personally, I prefer to draw trendlines on linear charts unless we are looking at a 10 or 20 year time period.

 

[motorway]

Re: Linear vs Log charts - When to use each?

I'm a relative novice to investing/tradeing charting and am sometimes confronted with the problem of which to use.

Generally I use linear as most of my charting is short term.

It seems to me that the dollar and percentage numbers are the same whichever you use, but there can be a significant difference in charting trendlines over time.

What are the pro's and con's of linear and log charting?

When should each be used and why?

What do people use?

Thing about retracements ( only as ONE example )

Their geometrical appearance
On a log chart 50% is not at a halfway point

Important point when dealing with the "look" of a chart

eg have a look at CNP as a log chart or a linear chart
over a decent time frame ..

Look at the suggestive danger of the retracement from the top
Before the DROP.. ( ie do not load the last drop but just until )

These deviations occur because the starting point of the chart determines the graphical appearance of a log chart, but not with a linear chart

No matter from how far up
a 50% retrace will appear at the measured halfway point on a linear chart

This is not true with a log chart

So Know your tools
and what you want to achieve.

motorway

 

[theasxgorilla]

Re: Linear vs Log charts - When to use each?

For actual technical analysis purposes the use of log charts IMO can play tricks on your mind. But on the flip side of that, for longer term investing the use of linear scale charts can also play tricks on your mind.

A stock that doubles and then doubles again, on the second doubling will traverse 200% further in price units during the second doubling. That can be difficult to take into consideration when you are peering at chart where the second move is double the first, but in % terms was exactly the same.

As the price action doubles and doubles again (Peter Lynch: multi-baggers) I think human nature is to feel that it looks increasingly expensive. That can make it difficult to buy at high price levels. Yet there is the adage touted by many pro's which goes something like: it's never too high to buy. Log charts can help put into perspective what a price unit move would look like in % terms...and as Motorway points out, it can help identify retracements as well as advances, thereby putting into perspective the relative depth of a pull back.

ASX.G

PS. As a related topic, though not often discussed as it has arguable validity is the 3rd dimension of actual price. X axis is time, Y axis is price units and Z axis is price value. You may convert RIO to a log scale and try to put into perspective it's advance from $25 to $50 and $50 to $100, but what is the likelihood of such a stock doubling again to $200? Is there a psychological implication for having such an excessive price? Thick of Nick Radge or Tech/a's recommended price filters of stocks less than $10 or $5 for identifying the price levels where growth stocks are more likely to exist.

 

[GreatPig]

Re: Linear vs Log charts - When to use each?

try to put into perspective it's advance from $25 to $50 and $50 to $100, but what is the likelihood of such a stock doubling again to $200?

I think it's just a matter of people getting used to those sorts of figures. Almost nothing was over $100 until recently, but that hasn't stopped RIO trading and continuing to rise.

And of course some companies will do a split to keep the actual dollar figure in the "normal" range for the ASX.

Cheers,
GP

 

[Stormin_Norman]

Re: Linear vs Log charts - When to use each?

I'm a relative novice to investing/tradeing charting and am sometimes confronted with the problem of which to use.

Generally I use linear as most of my charting is short term.

It seems to me that the dollar and percentage numbers are the same whichever you use, but there can be a significant difference in charting trendlines over time.

What are the pro's and con's of linear and log charting?

When should each be used and why?

What do people use?

log charting is used for judging exponential trends. ie when a bubble will burst, or a bust will turn. it will show the slow down in demand/rise in demand more clearly then a linear chart which shows data raw.

on a graph a linear char is a straight line, and a logarithmic line is a curve. therefore when wanting to look at how the slope of a line changes use logarithmic. if you want to get a simple straight trendline of best fit between all the points, then use linear.

i prefer to look at real numbers, but think marginally.

 

[howardbandy]

Re: Linear vs Log charts - When to use each?

Greetings --

If you are considering the equity curve, and want to compare annual percentage gains, you will want a log scale for the account balance.

A constant percentage increase is a straight line on a log scale.

Thanks,
Howard

 

[theasxgorilla]

Re: Linear vs Log charts - When to use each?

I think it's just a matter of people getting used to those sorts of figures. Almost nothing was over $100 until recently, but that hasn't stopped RIO trading and continuing to rise.

And of course some companies will do a split to keep the actual dollar figure in the "normal" range for the ASX.

You're spot on, for the time being. We're fortunate that not that many companies actually split on the ASX. I remember Metal Storm splitting way back during the dotcom days, I believe because they'd mistakenly listed at $3.00ish and realised that relative to their true market cap and perception as a growth stock that was too high. And so they did a 6-for-1 split and brought their trading price down to 50-60 cents. Mind you this was pre-2000, quite a while ago now, and I do think that people's inbuilt perception about what represents a cheap growth stock will shift upward with time. How to measure it? You can't.

 

[Wysiwyg]

Re: Linear vs Log charts - When to use each?

A stock that doubles and then doubles again, on the second doubling will traverse 200% further in price units during the second doubling. That can be difficult to take into consideration when you are peering at chart where the second move is double the first, but in % terms was exactly the same.

As the price action doubles and doubles again (Peter Lynch: multi-baggers) I think human nature is to feel that it looks increasingly expensive. That can make it difficult to buy at high price levels. Yet there is the adage touted by many pro's which goes something like: it's never too high to buy. Log charts can help put into perspective what a price unit move would look like in % terms...and as Motorway points out, it can help identify retracements as well as advances, thereby putting into perspective the relative depth of a pull back.

ASX.G

Stormin_Norman
if you want to get a simple straight trendline of best fit between all the points, then use linear.

I used the search function and found exactly what I was thinking about. Although still undecided.
This arithmetic as alternative to semi-logarithmic scaling issue has me in two minds of which to use for tracing trend lines.

My example shows the arithmetic trend line extended from two price lows. The third oval (arrow on semi-log chart) shows the trend line was honoured on the arithmetic scale chart.
On the semi-logarithmic scale chart, it is obvious the trend line cannot be traced from the first price low. Hence the trend line on a semi-log was not used.

I have never considered this before but it seems arithmetic scale charts are used by the majority and not only for tracing trend lines. Is this true???