Markets
52,912.35
323.64 (0.62%)

# Charts are never wrong, analysis is!

Karan DSIJ
/ Categories: Mindshare
4.4

Every now and then, we come across someone who doubts the usefulness of the technical analysis. On this, we would like to inform you that technical analysis works wonders and it has been around for decades now. It is one of the best methods used when it comes to studying the trend of the underlying and timing trade but at the same time, one needs to have a proper understanding of what to follow and what not to as the saying goes, ‘charts are never wrong, analysis is’.

Today, we have picked up an interesting topic about which beginners aren’t much aware of and even some of the celebrated technical analysts turn a blind eye to it. This in turn can dramatically affect how you perceive market action.

Linear vs Logarithmic scale

Linear vs Logarithmic scaling are the two primary chart scaling styles and both are available in almost every charting platform.

Let us quickly understand the basic difference between a linear and log scale. On a linear scale, each unit of price change is treated exactly the same. The price move from Rs 10 to Rs 20 would look the same from Rs 90 to Rs 100.

Whereas on a logarithmic chart, we have fixed distances between percentages move on a chart.

This is how a normal chart is constructed, where the price is on the Y-Axis and the time is shown on the X-Axis. The correct selection of the price scale will impact the trend lines that you draw on your price chart.

A good example is the price chart of Tata Motors. The chart on the left-hand side is plotted on a linear scale, while the chart on the right is plotted on a logarithmic scale. The upward sloping trend line broke down earlier on the logarithmic scale when compared with the trend line break on the linear scale price chart.

We would like to share one more example which will give you a much better and clear idea as to which is the best-suited scale to use while analysing the chart.

On the left-hand side is the linear chart of Maruti while on the right hand is the logarithmic chart of the same company. Notice the trendline drawn on the same. The very same trendline which was drawn on a logarithmic scale chart appears like this (no relevance) on a linear chart.

One more example we would like to share:

On the left-hand side is the linear chart of Aarti Drugs Limited while on its right hand is the logarithmic chart of the same company. Which chart gives a clear picture for doing analysis.

When there is a quantum jump in the price of any stock in a short period of time, the logarithmic scale is likely to present a clearer picture for doing analysis as it display price trends in a proportionate way.

To summarise: Scaling is an issue that is often overlooked in technical community, but since it can have an important influence on how trendlines can be interpreted, it should not be ignored at any cost. The difference between a logarithmic price chart and a linear price chart can be very slight when one is analysing a chart in the short-term, where price fluctuations are relatively small. However, as one increase the timeframe i.e. moves from short-term charts to a longer-term charts and where price fluctuations are large, one can spot major differences.

Previous Article Strides Pharma slumps despite getting nod from USFDA for Ursodiol capsules
Next Article Thomas Cook India dips over 3 per cent despite strategic agreement with Destination Maldives

## Get A Call From Industry Experts

I authorize DSIJ Pvt Ltd to contact me. This will override registry on the NDNC.

## Any upmove in Nifty likely to remain limited as 15,900 is a stiff resistance

Karan DSIJ / Article rating: 4.8
The level of 15,900-15,905 is a visible resistance in the near term and as long as Nifty does not close above this zone, there is a high...

## NASDAQ hits all time high; S&P 500 near life highs while Bitcoin turn positive after massive price drop!

### In midst of the chaos that is taking place in the crypto currency world NASDAQ just managed to hit an all-time high for itself. The S&P 500 is precariously poised to make its record highs as is trades just half a percent below its life highs.

Yogesh Supekar / Article rating: 5.0
NASDAQ Composite is a tech-heavy index and has been a world beating index in 2020. In 2021 so far NASDAQ has underperformed S&P 500 and even...

### SEBI registered Investment Advisers (RIA) are mandatorily required to obtain membership of BASL

Geyatee Deshpande / Article rating: 5.0
BSE Administration and Supervision Ltd. (BASL) has been granted recognition as Investment Adviser Administration and Supervisory Body (IAASB) for...

## Minda Industries set to acquire 51 per cent stake in UzChasys

abhinav lahoti / Article rating: 4.2
Minda Industries announced today after the market hours that it has won a bid to acquire a 51 per cent stake in the leading automotive lighting...

## SKM Egg zooms 10 per cent; will it follow suit of Venky’s India?

Karan DSIJ / Article rating: 4.2
The stock was nearly 10 per cent up and what was more noteworthy was the fact that it witnessed a mammoth surge in the volumes. Volumes...

## Weekend Read: Stock SIP in which IT bellwether stock would have given the best returns?

### Whether Stock SIP is better or a mutual fund SIP is totally different subject that needs detailed consideration.

Yogesh Supekar / Article rating: 4.8
Recently it is seen that lot of stock brokers are promoting stock SIP as a mode to beat market returns and is often touted to...

## Here is why it pays rich if you track earnings of Small-caps?

### One can rake in the mullah by simply tracking the earnings of small caps and micro caps.

Yogesh Supekar / Article rating: 4.5
The edge, an investor gets by tracking earnings over the investors who do not, is huge and can often explain the difference between...

## Know more about Meme stock and why investors prefer investing in them

Srinivasa Sharan / Article rating: 3.6

Learn about the concept of Meme stocks and why investors are rushing to invest in them.

## Behavioural biases in equity investing and ways to manage them as an investor

Srinivasa Sharan / Article rating: 3.2

How do we become better investors by managing our behavioral biases? Read about some of the biases and ways to overcome them.

## FAQs on ratios & measures used to analyse fundamentals of a company

Srinivasa Sharan / Article rating: 4.0

Insights into the measures and ratios used to evaluate the financial statements of a company