Arithmetic and Logarithmic Price Scales

When you plot your charts, you will have a choice of using arithmetic or logarithmic price scales. There are pros and cons to using each of them. Arithmetic scales, which are used on the chart above, have an equal distance up the left of the chart for an equal number, in other words the distance from 580 to 620, which represents 40 pence, is the same as the distance from 660 to 700, also 40 pence.

Logarithmic scales are drawn so that the same ratios between the prices are represented by the same distance – for instance, the distance from 10 to 20 is the same as the distance from 80 to 160, as in each case the first number has doubled. For the graphs shown above, it doesn’t make a lot of difference, but when you are looking at longer time scales, as the prices rise significantly over time, you can find that a logarithmic price scale gives you a different perspective on the stock chart, and we’ll look at an example when considering long-term charts.

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