Why You Must Employ Logarithmic Settings on Your Charts

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This is a frequently overlooked feature of TradingView by a lot of traders, but it is absolutely imperative that you remember to switch your chart setting to ‘logarithmic’ whenever you are looking at historical price data for Bitcoin or any other crypto asset that has seen a massive fluctuation in value.

If you do not know what we’re talking about, below is a brief tutorial:

Now, some people may be asking themselves, ‘What difference does this make?’

We could go into a long-winded explanation about this, but the easiest thing to do would be to show you all.

Below, we have recreated a chart of Bitcoin that only goes up to April 2018:

If you’re confused about why we did this, we’re explain very soon. Just bear with me.

For now, let’s focus on the chart.

The most important thing to note about the chart is that it only goes up to April 22nd, 2018, and it is also on the regular (not logarithmic) setting.

Now, on the next graph that you see below, we’re going to draw a downtrend resistance line that connects the highs.

In the chart above, it looks like Bitcoin had broken its long-term downtrend resistance toward the middle of April.

Indeed, many in the crypto community were looking at this very chart as a definitive sign that the bear market had ended and that Bitcoin would soon reverse course.

However, let’s see what the chart looks like with the logarithmic settings applied:

In the chart above, we didn’t change anything except for the scale of the chart to logarithmic instead of regular. As you can see, the line that we drew previously is entirely skewed at this point.

Let’s see what the chart looks like when we modify the line:

Now let’s go ahead and ‘play’ the next few bars and see how the price interacts with this long-term downtrend resistance on the logarithmic chart.

If we fast forward just a few days, we can see that the price failed to break that downtrend resistance.

From a trading theory perspective, this allows us to actually perform a successful R/R analysis by exiting the trade when the price gets closer to the downtrend resistance and locking in profits because we’re consciously aware of an impending drop.

Or, if one wasn’t in a position, they could have used this chart to plot/anticipate an early short position to take advantage of the push back.

Conclusion

It is imperative for traders to take into account when they should be switching to the logarithmic chart setting. This is not merely an aesthetic property. If traders fail to apply this chart setting in the proper contexts, then they run the risk of drawing incorrect inferences from the data – which may lead to a loss of funds.

Disclaimer: Nothing written about should be construed, perceived or accepted as financial advice. This is not written in advocacy of any personal finance strategies. The information above is simply an idea being promoted as an example of how one can form their own independent trading strategies. Whether the author has designated that they would place a long or short position or abstained from trading is solely their own prerogative; it is not meant to sway your own personal investment strategy. Your decisions are your own and the author assumes zero liability for the outcome of those decisions. The author has zero conflicts of interest currently to disclose. 

 

 

 

1 Comment:

  1. Notcrypto

    But if you used the standard linear scale and used a SL you still would have made profit. Only thing that matters is RR right?

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