Logarithmic Price Scale: Definition Vs. Linear Price Scale

What Is a Logarithmic Price Scale?

A logarithmic price scale, also known as a "log scale", is a type of chart scale where equivalent price changes are represented by the same vertical distance on the scale.

Key Takeaways

• Logarithmic price scales are used on charts to represent equivalent price changes with the same vertical distance.
• They are commonly used for analyzing long-term price changes.
• They differ from linear price scales by displaying percentage points instead of dollar price increases.

Understanding Logarithmic Price Scales

The distance between numbers on a logarithmic price scale decreases as the asset price increases. A $1.00 price increase becomes less influential as the price rises since it corresponds to a smaller percentage change. The alternative to a logarithmic price scale is a linear price scale.

Logarithmic price scales are the default setting for most charting services and are widely used by technical analysts and traders. Common percentage changes are represented by equal spacing between numbers on the scale. For example, the distance between $10 and $20 is the same as the distance between $20 and $40 because both represent a 100% price increase.

These charts differ from those using linear price scales, which focus on dollar amounts rather than percentage points. On linear price scales, prices on the y-axis are equally spaced and do not become more condensed as the asset price increases.

Logarithmic price scales tend to show less drastic price increases or decreases compared to linear price scales. For instance, if an asset price drops from $100.00 to $10.00, the spacing between each dollar would be very small on a linear price scale, making it difficult to observe a significant move from $15.00 to $10.00. Logarithmic price scales address this issue by adjusting the prices based on percentage changes. In other words, a substantial percentage move will always correspond with a noticeable visual move on logarithmic price scales.

Linear price scales can be useful for analyzing less volatile assets as they can help visualize how far the price needs to move to reach a buy or sell target. However, it is generally recommended to view linear charts on a large screen to ensure all prices are visible.

Logarithmic Price Scale Example

The following chart demonstrates the use of a logarithmic price scale for NVIDIA Corp. (NVDA):

In the chart above, you can see that the distance between $20.00 and $40.00 is wider than the distance between $100.00 and $120.00, despite both cases having a $20.00 absolute difference. This is because the difference between $20.00 and $40.00 represents a 100%, while the difference between $100.00 and $120.00 is only 20%.

In the chart above, you can see that the distance between $20.00 and $40.00 is wider than the distance between $100.00 and $120.00, despite both cases having a $20.00 absolute difference. This is because the difference between $20.00 and $40.00 represents a 100%, while the difference between $100.00 and $120.00 is only 20%.