Arithmetic Scale Price/Chart Pattern
The choice between
arithmetic and logarithmic or ratio
scaling determines the significance
of the measuring implications.
Most of the results
obtained with technical analysis procedures do not
indicate the eventual duration of a trend. Price
Patterns / Chart Patterns are the exception, since their construction
offers some limited forecasting possibilities. Before we
examine this aspect, it is first necessary to draw the
distinction between arithmetic and logarithmic or ratio
scaling, because the choice determines the significance
of the measuring implications.
Arithmetic
charts consist of an arithmetic scale on the
vertical or y axis, with time shown
on the horizontal or x axis. All units of
measure are
plotted using the same vertical distance, so
that the difference in space between 2 and 4
is the same as that between 20 and 22.
Arithmetic scaling is not a good choice for
long-term price movements, since a rise from
2 to 4 represents a doubling of the price,
whereas a rise from 20 to 22 represents
only a 10 percent increase.
I
n the U.S.
stock market, a price move in excess of 50
points for the Dow is normal. A 50 point
move in 1932, though, when the average was
traded well below 100, would have
represented a huge move. For this reason,
long term movements should be plotted on a
ratio or logarithmic scale. The choice of
scale does not materially affect daily
charts, in which price movements are
relatively small in a proportionate sense.
For periods over 1 year, in which
fluctuations are much larger, It is
recommended to use a ratio scale.
price patterns/chart patterns -
Arithmetic Scale Price/Chart Pattern
