Channels On Charts Need Log Scale

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Log scale is an option you can turn on when doing most financial charting.  Your software may default to off, so you need to check this.  You should really have log scale on your trading and investing charts all the time.  However, the case where you really need to have it is long-term trends and channels

The reason is simple.  If you look at when NVDA doubled from $20 on, it is 40, 80, 160 and, if it made it, 320.  So if you invested $10k at $80, you got the same 100% return on investment that you obtained when it went from $20 to $40.  In other words, in capital markets, it is percent return on investment that matters, or growth.  Not actual dollar amounts of individual stocks.  You only care how much your $10k will make. 

If you don’t use log scale, it will appear as though trends shoot up like a rocket, as it might go from $80 to 160 in the same amount of time it went from $20 to $40.  This creates a false breakout.  You won’t know if something truly breaks above the channel top unless you are using log scale to smooth it out into percent gains. 

So, here is a chart of NVDA with log scale enabled.  A nice clean channel.  You can see via weekly bars when it broke, and you can see the result.   Down down down.  Some people will note the market tanked during this time.  But isn’t that really a chicken and egg herring?  You have FB and NVDA breaking their channel, and plunging as a result.  Doesn’t this contribute the velocity of the market drop, especially with correlations? 

Now, look at this same chart where the only difference is log scale is disabled:

Looks very different.  You might of had some sort of channel for the past year, but not over this larger time frame going back to 2015.  A move from 20 to 300 is 15x.  investors from 20 to 160 quadrupled their investment, while those jumping in at 150 no more than doubled it. 

To understand it clearly, look at the distances between the prices on the Y axis.  With log scale, 20 and 40 are a lot further apart than 260 and 280, despite both being $20 differences.  If you bought at 260 and sold at 280, did you double your money? Or was it a smaller move for you than the one who bought 20 and sold 40? 

 

 

 

About Erik Calco

With a passion for Investing, Business, Technology, Economics, People and God, Erik seeks to impact people's lives before he leaves. Contact Erik
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