Understanding Logarithmic Charts and Knowing When to Use Them + TradingView Guide

Source: Wikimedia Commons

A few folks asked me before why I use logarithmic charts for Bitcoin. The article posted below gives a great explanation for why.

http://allstarcharts.com/trendlines-logarithmic-scale-charts/

Logarithmic charts are better in general when you’re looking at the evolution of price over a long time frame (weeks/months) and when there is a lage discrepancy in price.

For bitcoin for example, there was a time when the price was almost $20k. There was also a time when the price was $6k. This is a huge difference.

Naomi Robbins from Forbes explains this well in this article here: https://www.forbes.com/sites/naomirobbins/2012/01/19/when-should-i-use-logarithmic-scales-in-my-charts-and-graphs/#e53d4ff5e67b

“Pete, what are you talking about with ‘log’ charts?”

First, you want to visit https://tradingview.com , then you want to open the BTCUSD (any exchange) chart as normal.

Step 1
Step 2
Voila! The chart has been changed from its normal setting to a ‘logarithmic’ chart.

Now look at my $BTC chart. See how it’s completely different? I didn’t move the trendline at all.

So, What Happened?

I fixed the trendline on the log chart. But as you can see from the picture above — the downtrend was officially broken on April 21st.

The ‘regular’ chart told us that the trendline was broken on April 13th, which was premature. Now, this ended up still working in favor of those that did not have their charts set to a logarithmic function — but this could result in being caught unknowingly in a bull trap in the future.

Quick Review: What’s a Bull Trap?

Investopedia summarizes it best here:

Source: https://www.investopedia.com/terms/b/bulltrap.asp

Once again, if you’re still a bit confused on why this is necessary at all — this article on Forbes is a good introductory read (not too in-depth):

When Should I Use Logarithmic Scales in My Charts and Graphs?

This post offers reasons for using logarithmic scales, also called log scales, on charts and graphs. It explains when logarithmic graphs with base 2 are preferred to logarithmic graphs with base 10. It also explains several advantages that dot plots have over bar charts.

Conclusion

Basically, this speaks to the heart of math/statistics. Specifically, when dealing with stuff like stocks/cryptocurrency, a movement of $1,000 is a MUCH bigger deal when the price is $6,000 vs. when the price is $20,000.

So, the log chart sort of factors that in. With a regular chart, an increase of $20 to $1,020 looks no different than an increase of $50,000 to $51,000.

And when you’re viewing price information and trying to make an informed trade — you don’t want to be having your perception of price action skewed at all or it could result in a disastrous trade.

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