Hi Toofuzzy! Log VS Linear scale…
“…but why bother for the trading signals if the answer is the same?”
The answer is not the same Toofuzzy. The differences between log and linear scale charts go much deeper than just visual.
Take for example a price range between $1.00 and $100. Let’s say I want to be 50% invested when the stock price sits at 50% between the top and the bottom of the range. On a linear scale that 50% mark is $50.50. On a log scale it is $10.00. We have over 40 dollar price difference between the log and linear scale. The difference is even greater when it comes to cash allocation. With a $10,000 account, the linear scale would tell me to invwest $5,000, whereas the log scale would tell me to invest $1,483.54.
“You can always take the values and put it on the log chart.”
What values? $5,000 or $1,483.54?
Let’s say my strategy is to invest money in 10 equal portions of the total amount of $10,000, which comes to $1,000 for each potion. I also want to spread out my equal dollar portions invested across equal portions of the price movement of a stock. So I divide the total price range of a stock into 10 equal parts. I will be investing 1/10th of my cash into each part. Seems simple enough, right? On a linear price chart, assuming we have a price range between $1.00 and $100, 1/10th of the scale will be roughly $10 per step. So, working with the capital of $10,000 we invest $1,000 on the first step at $1.00 price level. On the second step, at $10, we invest another $1,000. On the third step at $20, we invest $1,000 and so on. As for the sell criteria, we want to sell each portion when the price reaches the second step. So, our round trip equals one step, or $10.00.
Now let’s look at the profits we can expect to make using this linear scale. This is where the rubber meets the road. The profit we have made on the first step is $9.000. The break down of the math is as follows: The first purchase of 1,000 shares at $1.00 per share for a total investment of $1,000, with the price increase from $1.00 to $10.00, a $9 increase (1000 X 9 = $9,000 profit).
The profit from the second step is only $1,000. We bought 100 shares at $10 for $1,000 invested. Price went from $10 to $20, a $10 increase (100sh X $10 = $1,000 profit).
The profit from the 3rd step is $500, which is even less than profit from the second step. We bought 50 shares at $20 for $1,000. The price went from $20 to $30, a $10 increase. (50sh X $10= $500 profit).
I’m going to skip the other steps and just give you the profit of the last 10th step. We bought 11.11 shares at $90.00 for $1,000 invested, and sold them at $100 price, for a whopping profit of $111.
As you can see, we were investing the same amount of $1,000 on each step of the way, but our profits kept diminishing from $9.000 on the first step to just $111 on the last 10th step. Note that on each step the price increased by $10, the same amount every time. That’s linear scale for you at it’s best.
Log scale doesn’t have any of these issues.
Vitali
