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 ScaleNormal 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 ScaleLog 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 TermIn 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 tobe concerned with compound growth rates.
Long TermMost 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.
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