When I look at stock market graphs, I commonly see them in logarithmic. However, upon a closer look, I realize that logarithmic just distorts the graph and makes some of the points bigger than they should. Is there a reason to look at graphs logarithmically? Should I be looking at stock market graphs like that?
Hopefully you can see the difference, if not, go to chart settings and chart scale.
Thanks.
Log graphs usually make sense when you want to notice big changes and/or when the range of possible values is really big. These graphs are more often encountered in engineering/science contexts and they’re not distorted if you know what they mean. You could look here for more general information.
I almost always look at the linear graphs when viewing stock charts. Log charts might make more sense if you delve deeper into technical analysis (which I don’t value a lot).
Logarithmic scales make exponential trends look like linear trends, and thus a little bit easier to analyse.
That’s one of the rare useful things I learned while earning an economics degree.
Hey Numero,
I like to look at both styles of chart, log and arithmetic scale. There are different uses for each scale.
When I first started looking at stock price charts, the linear (arithmetic) scale was one you’d commonly run into, basically the default standard at many sites. Over time, Yahoo and the other free charting sites began to offer both chart styles.
The advantage of log charts is that they give you an accurate picture of how prices have progressed over longer-term timeframes, or when there has been a sharp run up in price.
As you know, the Y axis on a log chart shows price movements in equal percentage terms. It takes just as much distance on the Y axis to chart a move from $10 to $20 as it does to chart the move from $20 to $40. Both price moves represent a doubling in price, even though the latter move (from $20 to $40) is larger in terms of absolute change in price (a 20 point move, over a 10 point move in the case of the former.).
Here are a couple of handy reference links outlining the benefits for each chart style. As you’ll see, there are instances when each can be useful.
http://www.fool.com/foolfaq/foolfaqcharts.htm
http://www.incrediblecharts.com/technical/trendlines.php
Hope this helps!
David
Thanks for the help. Do you also know where I could find another charting of the stock market, one that goes before 1928 preferabbly? (Thats what yahoo starts with). Linear would be nice too :).
Hi Numero,
Sorry for the late reply. For some reason I just got an automated email response from Mises community on this thread!
Here’s a chart of the Dow going back to 1900. It is in log scale, because of the time length involved and the huge rise in numerical terms.
http://stockcharts.com/charts/historical/djia1900.html
To get a view of what that rise would look like on an arithmetic scale, scroll down to the DJ Industrials 1885 to 2008 chart here:
http://www.gold-eagle.com/editorials_08/lundeen101308.html
You might be able to find more like this with a search of “stock market charts historical” or some variation. A lot of the very long term data is available mostly through subscriber data and charting services, but there are some free resources available as well.