This 5-Minute Video Will Teach You the Chart Mistake Most Traders Make Every Single Day.

Key Concepts

• Arithmetic (Linear) Scale: A charting method where the vertical axis (y-axis) represents fixed, equal dollar amounts, resulting in evenly spaced intervals.
• Logarithmic (Log) Scale: A charting method where the vertical axis represents equal percentage changes, causing the distance between price points to shrink as the price increases.
• Technical Analysis: The study of market action, primarily through charts, to forecast future price trends.
• Scaling: The method of mapping price data onto a visual graph.

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1. Arithmetic vs. Logarithmic Scaling

The fundamental difference between these two charting methods lies in how they represent price movement:

• Arithmetic Scaling: Uses fixed price increments. A $50 move from $50 to $100 occupies the same vertical space as a $50 move from $600 to $650. This creates a distorted view of performance over long timeframes, as it emphasizes absolute dollar changes rather than relative percentage growth.
• Logarithmic Scaling: Uses percentage-based increments. It accounts for the fact that a move from $1 to $2 (a 100% gain) is significantly more impactful than a move from $101 to $102 (a ~1% gain). On a log chart, the vertical distance represents the rate of change, making it the standard for long-term technical analysis.

2. Visual Impact and Technical Utility

• Drawn Objects: Technical analysis tools—such as trendlines, channels, and support/resistance levels—rely on accurate scaling. On an arithmetic chart, these objects often become misaligned or "a big fat mess" when applied to assets with significant long-term growth, as the chart fails to account for the compounding nature of price increases.
• Data Integrity: Both scales use the exact same underlying price data. The difference is purely in the presentation. Log scales provide a "cleaner" and more accurate representation of historical trends, whereas arithmetic scales can create misleading visual spikes.

3. Real-World Applications and Use Cases

• Low-Volatility Assets: For instruments with minimal price movement (e.g., the SGOV interest-bearing fund), the difference between log and arithmetic scales is negligible. In these cases, either scale is acceptable.
• Long-Term Growth Assets: For stocks like Walmart (WMT), which have experienced massive growth over decades (from pennies to over $100), an arithmetic chart creates a "crazy" visual that exaggerates recent price action while obscuring early-stage growth.
• The "Journalist’s Tool": The only practical use for an arithmetic scale on a long-term chart is to create a dramatic visual impact. By using a linear scale for a stock with massive percentage gains, a presenter can "knock people's socks off" by visually emphasizing the sheer magnitude of the price increase, even if it is technically less accurate for analytical purposes.

4. Key Arguments and Synthesis

• Percentage vs. Dollars: The speaker argues that in trading, percentage change is the only metric that matters. Because arithmetic charts treat a $1 gain at a low price the same as a $1 gain at a high price, they fail to reflect the reality of investment returns.
• Technical Accuracy: Logarithmic scaling is presented as the "tried-and-true" method. It is essential for maintaining the integrity of technical analysis tools and ensuring that trendlines and channels remain valid across different price levels.
• Conclusion: While arithmetic charts have a niche use for dramatic presentations, traders and analysts should default to logarithmic scales. Log charts provide a more visceral and accurate experience of market movement, ensuring that technical features function correctly and that the viewer understands the true percentage-based performance of an asset.