Tuesday 27 September 2011

Copper and chart scaling- log or arithmetic?







One much overlooked aspect of charting(along with the dimension of 'time' itself) is the question of whether to use logarithmic or arithmetic scale charts. This is of particular interest for anyone out there using linear lines- trend/reaction/multipivot/Andrews forks etc. In this particular case we are looking at the reaction line in thick brick red in the above charts of HG Copper. left chart arith/right chart Log

Basically logarithmic-scale charts plot changes on the vertical axis (or Y axis) in terms of percentage change. A change from $1 to $2 is a 100 per cent change so would appear exactly the same as a change from $50 to $100. (Most charts are technically semi-log charts because time is still shown arithmetically).
The chart below is a normal or arithmetic-scale chart. Note the Y-axis values are equal distance apart. You can also see how the reaction and median lines appear much differently from the other chart. It is often necessary to keep re-drawing reaction lines (as I have do) on both artithmetic and the log charts, which can lead to some extremely impressive correlation between price and the reaction lines on a ultra low time frame like 1 min- where i choose always to enter a trade regardless of if it is a short term intra day trade or a 'keeper' ie, a position trade to be held for days/weeks. The reasonfor this is i do not have deep pockets for stops and those traders (John Crane for example) who place their stops so far away from the market you need to get on a bus to visit them I often suspect of being educators first and traders second( if at all)! As the saying goes...Those who can trade- those who can't teach.
Great care should be taken to find the true location of a median/reaction/warning etc line and the phenomenon of a line exisitng in two different chart postions and having a visible reaction in each seperate location is one secret i observe every day.
left Arithmetic- right Log

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