What is a logarithmic price scale?
A logarithmic price scale is a type of scale used on a graph that is plotted so that two equivalent price changes are represented by the same vertical distance on the scale. The distance between the numbers on the scale decreases as the price of the asset increases. After all, a $ 1.00 increase in the price becomes less influential as the price increases, since it corresponds to less than a percentage change.
Key points to remember
- Logarithmic price scales are a type of scale used on a graph, plotted so that two equivalent price changes are represented by the same vertical changes on the scale.
- They are generally used for long-term prospective analysis of price changes.
- They differ from linear price scales because they display percentage points and not dollar price increases for a stock.
Also called “logarithmic scale”. The alternative to a logarithmic price scale is known as a linear price scale.
Understanding logarithmic price scales
Logarithmic price ranges are generally accepted as the default setting for most mapping services, and are used by the majority of technical analysts and traders. Current percentage changes are represented by equal spacing between the numbers on the scale. For example, the distance between $ 10 and $ 20 is equal to the distance between $ 20 and $ 40 because the two scenarios represent a 100% increase in the price.
These graphs differ from those that use linear price scales, which look at dollars instead of percentage points. On these charts, prices on the y-axis are also spaced rather than becoming more and more condensed as the price of assets increases.
Logarithmic price scales tend to show less severe price increases or decreases than linear price scales. For example, if an asset price fell from $ 100.00 to $ 10.00, the distance between each dollar would be very small on a linear price scale, making it impossible to see a large movement of 15 $ 00 to $ 10.00. Logarithmic price scales solve these problems by adjusting prices according to the percentage change. In other words, a significant percentage movement will always correspond to a significant visual movement on logarithmic price scales.
Linear price scales can be useful when analyzing assets that are not as volatile, as they can help you visualize how far the price has to go to reach a buy or sell goal. However, it is generally a good idea to display line graphs on a large screen to ensure that all prices are visible.
Example of a logarithmic price scale
The following graph shows an example of a logarithmic price scale for NVIDIA Corp. (NVDA):
In the graph above, you can see that the space between $ 20.00 and $ 40.00 is much wider than the space between $ 100.00 and $ 120.00, despite the absolute difference of 20, $ 00 in both cases. The difference between $ 20.00 and $ 40.00 is 100%, while the difference between $ 100.00 and $ 120.00 is only 20%.