Definition of the linear price scale
What is a linear price scale?
A linear (arithmetic) price scale is a graphical scale used by traders that is plotted with actual values spaced equidistant from each other on the vertical y-axis. Each unit change is represented by the same vertical distance on the chart, regardless of the price level the asset is at at the time of the change.
A linear scale can be compared to a logarithmic scale. The interpretation of a stock chart can vary from trader to trader depending on the type of price scale used when visualizing the data.
Key points to remember
- Linear price scales, also called arithmetic, plot the price of an asset on the y-axis using equidistant spacing between price marks.
- A linear price scale chart displays changes in absolute terms and does not depict price movements relative to their percentage change.
- A logarithmic price scale chart, on the other hand, is plotted to show the percentage change that occurs as a price moves from one quote to the next, such that each price mark is greater d a factor of ten.
How Linear Price Scales Work
Linear price scales and logarithmic (log) price scales are two types of charts commonly used in the financial industry. Both types of charts can be used by technical analysts. Each of the graphs is usually generated from software automation. Linear price scale charts can more easily be drawn manually because they are based on static units representing absolute values.
Logarithmic charts generally require the use of advanced graphical programming because their unit value movements are not constant but rather expressed in percentages. Line and logarithmic charts will use the same x-axis dates for their graphical representation.
A linear price scale can also be called an arithmetic chart. The linear price scale chart does not depict or scale movements relative to their percentage change. The linear price scale plots price level changes with each unit change corresponding to a constant unit value. Since each value change on the grid is constant, linear price scales can more easily be drawn manually.
Example of a linear price scale
A linear price scale is easy to identify because the vertical axis will always be plotted with equidistant values.
For example, a linear scale ignores the fact that a $5 move is larger when an asset’s price is $10 than when the asset’s price is $50. The price movement that is plotted on the chart is represented as the same distance on the scale, even though an increase of $5 from $10 equals a 50% increase, while an increase of 5 $ from $50 is a 10% increase.
Logarithmic price scales and charts
A logarithmic price scale chart is plotted to show the percentage change that occurs when a price moves from one quote to another. They plot the percentage movement of the price by representing it mathematically in the vertical movement.
Therefore, if a price increases by 1%, its upper vertical movement will be much less than a vertical movement illustrating the price change of a 50% increase. To allow for mathematical scale price movements per unit change, advanced charting software creates a non-static vertical axis. In a logarithmic price scale, the vertical y-axis changes scale with each price movement.
A linear and logarithmic price scale chart will have the same visual appearance in the body of the chart. However, a logarithmic chart will have an adjustable vertical y-axis that can more clearly show breakout levels at which a price has made large percentage moves. If price changes occur in small percentages, a logarithmic price chart will also depict this with concentrated price levels on the y-axis rather than large gaps between prices.
While it’s important to understand the difference between linear and logarithmic price scales when reading charts, there are other forms of technical analysis you can use to identify and capitalize on price trends.