Definition of the logarithmic price scale

What is a logarithmic price scale?

A logarithmic price scale, also called a “logarithmic scale,” is a type of scale used on a graph that is drawn such that two equivalent price changes are represented by the same vertical distance on the scale.

Key points to remember

  • Logarithmic price scales are a type of scale used on a graph, plotted in such a way that two equivalent price changes are represented by the same vertical changes on the scale.
  • They are generally used for long-term prospective analysis of price changes.
  • They differ from linear price scales in that they show percentage points and not dollar price increases for a stock.

Understanding logarithmic price scales

The distance between the numbers on the logarithmic price scale decreases as the price of the asset increases. After all, a $ 1.00 increase in price becomes less influential as the price increases, because it corresponds to a lesser percentage change. The alternative to a logarithmic price scale is known as the linear price scale.

Logarithmic price scales are generally accepted as the default setting for most charting services, and they are used by the majority of technical analysts and traders. Current percentage changes are represented by equal spacing between numbers on the scale. For example, the distance between $ 10 and $ 20 equals the distance between $ 20 and $ 40 because both scenarios represent a price increase of 100%.

These charts differ from those using linear price scales, which look at dollars rather than percentage points. In these charts, the prices on the y-axis are evenly spaced rather than becoming more and more condensed as asset prices rise.

Logarithmic price scales tend to show smaller increases or decreases in price than linear price scales. For example, if the price of an asset collapsed from $ 100.00 to $ 10.00, the distance between each dollar would be very small on a linear price scale, making it impossible to see a large movement of $ 15.00 to $ 10.00. Logarithmic price scales solve these problems by adjusting prices for the percentage change. In other words, a significant percentage movement will always correspond to a significant visual movement on logarithmic price scales.

Linear price scales can be useful when analyzing assets that are not as volatile, as they can help you visualize how far the price must move to meet a buy or sell target. However, it is generally a good idea to display line charts on a large screen to ensure that all prices are visible.

Example of a logarithmic price scale

The following graphic shows an example of a logarithmic price scale for NVIDIA Corp. (NVDA):

Image by Sabrina Jiang © Investopedia 2021

In the graphic above, you can see that the space between $ 20.00 and $ 40.00 is much wider than the space between $ 100.00 and $ 120.00, although the absolute difference is $ 20.00 in both cases. This is because the difference between $ 20.00 and $ 40.00 is 100%, while the difference between $ 100.00 and $ 120.00 is only 20%.

Richard L. Militello