Scaling Stock Charts for Profit: It’s Only Money
To manage your stocks, you’ll likely be looking at uptrends, downtrends, bases, and tops. However, all bases and tops can be visually altered by the charting software. This is not a negative of charting software, but it is important that you understand the scaling that the computer is doing.
Charting software uses two components to scale the chart, which can create dramatic differences. The software uses these two scaling components:
- The software analyzes the range of the chart, which defines how far back in time to go.
- Then the software analyzes the high and low throughout that range on the stock and adjusts the scale.
The following information explains different types of scaling and how to set the correct scaling on charting software.
This image has an arithmetic scale on the right on the top chart for Tesla (TSLA) and on the bottom chart for Total Fina Elf (TOT). Both charts look like they are going up at about the same rate visually.
Because each stock has its own price value, the charting software makes the price display tall enough to fully cover the height of the chart. The way to manage that is by changing the scale on the right. Tesla is moving in $10 increments while Total is moving in $0.50 increments.
Total has moved up $9.90. In percentage terms, Total has moved up 22 percent from the low to the high, while Tesla has moved up 86 percent in the same time period. Each black range on the chart is 10 percent. As Tesla goes higher, you can see that it has to move $30 rather than $20 to move 10 percent. On Total, $4.50 is a 10 percent gain at $44.50. A $4.50 gain on Tesla would be a small percentage gain.
We usually compare stocks by discussing the percentage move. When Tesla was a young company, a $4.50 move would be exciting for the stock. As the company has become a large-cap stock, the $4.50 is a small percentage move. If you want to recognize the percentage size of the move in Tesla’s early days compared with the current percentage moves, you need to use a different chart scale called a logarithmic chart.
The image below is a logarithmic scale showing the same stocks as you see above, Tesla and Total Fina Elf. You can plot the scale so that as the price moves higher, the scale keeps a 10 percent move the same height starting at any price point on the chart.
Typically, logarithmic charts are used for long ranges of multiple years when the price is rising quickly. Apple at $2 compared to Apple at $140 can be compared when you can see the huge percentage moves that happened in the early days of the company. When you show them on the logarithmic chart, a 10 percent move back in 2000 looks the same size as a 10 percent move at $140.
Here are some guidelines with regard to scaling:
- Use arithmetic scales on short-term charts (under a year).
- Use logarithmic charts for long time frames.
- Be careful assuming one stock is going up as fast as another because both charts have the same shape. The change in scales can alter this view.
- A parabolic move that happens over a short period of time will look more upright on an arithmetic chart than on a logarithmic chart.
You can access scaling options only when you sign up for the trial membership at StockCharts.com; these options are not available with free charts. You set your scaling option at the time you pick your trend line.