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Stocks & Commodities V. 1:5 (123-123): The Logarithmic Scale. by JACK K. HUTSON

The Logarithmic Scale.

 by JACK K. HUTSON 

Semi-Logarithmic (ratio, proportion or percentage paper) graphic rulings are used when the analyst

wants to compare percentage price changes rather than absolute price changes. By plotting the logarithm

of price in lieu of price itself we are able to directly compare percentage change in price at the three

dollar verses the thirty dollar level. Mathematically, if there is a fixed percentage change between two

pairs of prices the difference between the logarithms of the price will be equal.

When the logarithms of price rather than the actual price are graphed, a constant rise or fall in price will

equal a constant profit (or loss) percentage change. It is well-documented that stock and commodity

prices follow general rules of percentage directional moves and corrections. These can be followed easily

using a logarithmic price scale and measured directly from the chart.

Because of the time required to calculate logarithms, it is common practice to use graph paper that has aspecial logarithmic scale.

The logarithmic scale graph paper allows the trader to plot prices directly without calculating the

logarithm. The relation between a simple arithmetic price scale and a scale corresponding to it but

prepared for plotting logarithms is shown in Example 2.

The term 'Semi-Logarithm" is used when only one chart scale (price) is plotted on a logarithmic scale;

"Logarithmic" is used when both axes are logarithmic. Thus Semi-Logarithmic graphs are often used in

stock and commodity work where price is plotted on a log arithmic scale (Y-axis) vs. time (X-axis).

One of the noted characteristics of a logarithmic scale is that there is no zero base line. Logarithmic price

scales are used to easily compare proportional rates of price change, and to show the relationship between

two or more time series that differ widely in dollar (scale) amount. The following chart clearly portrays

the advantage of plotting a number of related items on the same Semi-Logarithmic price scale.

Article Text 1Copyright (c) Technical Analysis Inc.

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Stocks & Commodities V. 1:5 (123-123): The Logarithmic Scale. by JACK K. HUTSON

Figures 2Copyright (c) Technical Analysis Inc.

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Stocks & Commodities V. 1:5 (123-123): The Logarithmic Scale. by JACK K. HUTSON

Example 1:

Example 2:

Figures 3Copyright (c) Technical Analysis Inc.