Should you use Log scale for technical analysis.
A logarithmic price scale ensures equal % change is shown equidistant on the chart. Otherwise (with linear price scale) you get a very absolute view of just change in price and it’s not relative. So since technical analysis is all about price projection relative to historical prices … it makes more sense to use logarithmic price scale to account for this relativity.
A simple example can be - if SENSEX is at 4000 and it moves 1000 points in a day - it is a big deal. The next day headlines will read - “Market moves 25% in a single day.” However, If the market is at 50000 and it moves 1000 points, it is just a 2% move and will barely make news. Now imagine how will you capture this anomaly in chart and log is the way out.
In my view, log price scale is preferred. However, you will get as many opinions as there are people using technical analysis. So, suit yourself
Thank you for a good explanantion. Another question(might sound naive) which scale is followed more - Linear or Log? I mean according to which scale does the market work?
Those are two different questions -
Among seasoned traders and investors - definitely log scale is followed more.
I wish it was that simple. Markets are forward looking and based on human emotions - fear and greed. They do not follow any scale. Inherently, charts just depict historical data and any scale (log or linear) is a poor indicator for what is in stored in the future.
You will probably realise this only by experiencing it first hand. And if you are here long enough, you will figure out your own sweet spot (based on whatever scale you choose) which will depict when to fight with the market and when to let go. And thats all there is.