The price movements of a stocks can be viewed in many different Chart formats, such as candlesticks, open-high-low-close (OHLC), or line chart. Same as, there are two methods for displaying the price chart scale and these are linear and logarithmic. Most charting and trading platforms allow you to switch between seeing prices in linear or logarithmic scale. At first glance, they may look similar, but there are significant differences between these chart types.
An arithmetic or linear scale displays same points or units as the same vertical distance no matter what the price level, means each unit of measure is the same throughout the entire scale. If a stock price advances from 10 to 80 over a 6-month period, the move from 10 to 20 will appear to be the same distance as the move from 70 to 80. Even though this move is the same in absolute terms, it is not the same in percentage terms.
For example, see this S&P 500 index daily chart of last 1 month, where candlestick chart is plotted on linear scale where each horizontal grid line scale displays 10 points movement of S&P 500 index.
A logarithmic scale measures price movements in percentage terms. An advance from 10 to 20 would represent an increase of 100%. An advance from 20 to 40 would also be 100%, as would an advance from 40 to 80. All three of these advances would appear as the same vertical distance on a logarithmic scale. Most charting programs refer to the logarithmic scale as a semi-log scale, because the time axis is still displayed arithmetically.
For example, see this S&P 500 index monthly chart of last 5 years, in which with price movement scale adjusted. First each unit was of 20 points which changed to 25 and then as highs as base become big, it changed again to 50 points.
The difference between linear and logarithmic price scales are important to understand when reading charts, because it is useful in many forms of technical analysis and that you can use to measure, identify and capitalize on price trends.
Some charting software will use a linear scale by default, while other charting software will use a logarithmic scale by default. This setting can be changed within most charting platforms either setting can be used, but interpretation of the chart may be affected by the choice.
Short-term traders must use linear charts because these traders are only concerned with how much the price actually moves.
While Longer-term traders or investors must use both logarithmic and linear charts to gain a different perspective, especially when viewing charts spanning years or significant price differences.
I think this information will give you clear idea about price chart scale and its uses. We will continue our basic of chart analysis in upcoming posts, as it is necessary to learn chart basics before starting professional technical trading journey.