Stock Forecast Methods

Stock Market Trading and Investing

Using Logarithmic Price Scale for Stock Performance

It is nice to see a simple linear chart with dollar numbers that is easy to calculate. However, linear price scale may not be good for significant changes in stock prices if we calculate money in terms of return on investment (ROI). For example, the change $10 of SP-500 gives around 10% market performance in 1970 but the same $10 change is equivalent only 1% of SP-500 performance in 2010.

Using Logarithmic Price Scale for Stock Performance

So that be aware that big changes on linear graph can be misleading since they may not represent big ROI. That is why logarithmic (log) price scales are used by many investors and technical traders. Log scale graphs correctly show in the percentage the rate of return-on-investment for both, small and big changes in prices. Log graphs show percentage changes accurately, since the same interval anywhere on the price scale represents the same percentage change.

Such software tool, as Stock Market Analyzer-Predictor SMAP-2/3, works with multi-year periods. That is why it uses a logarithmic re-normalization.

© Alex Shmatov. Published with permission of the copyright owner. Further reproduction strictly prohibited without permission.

Advertisements

March 5, 2010 - Posted by | Stock Market Forecast, Stock Market Software | , , , , , , ,

2 Comments »

  1. Hi, I’m still not understanding what a Log chart is and exactly how it is calculated or created.
    What I’m looking to do is to calculate the Log of the change in price from day to day.
    Thanks,
    Daniel

    Comment by Daniel | November 18, 2010 | Reply

  2. So far I’ve found this to help define Log vs. Linear Charts:
    http://www.fool.com/foolfaq/foolfaqcharts.htm

    Comment by Daniel | November 18, 2010 | Reply


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: