Arithmetic and logarithmic scales

Timewise charts: We explained different charting techniques like line chart, bar chart, etc. last week. You can plot all these charts over different time periods (i.e. minute-wise, hourly, daily, weekly, monthly, quarterly, etc.). These time periods are selected according to the requirement of the trader. For example, a day trader, who squares off his position on the same day, will use minute-wise intra-day charts to identify turning points during the day. This is similar to using a microscope to look at the market. If the investor is a mediumterm player, he can easily manage it with the help of daily charts that stretch up to one year and this is similar to viewing the data with the naked eye. However, longterm investors need market direction for much longer periods and use weekly or monthly charts with data points for at least over a decade. This is like looking at the data through a telescope.

Arithmetic and logarithmic scale: While arithmetic and logarithmic scale charts look similar when they are plotted for short durations, they will look significantly different when the same are plotted for long durations. For instance, look at the difference between two 30-year Sensex charts, one plotted on arithmetic scale and the other on logarithmic scale. The arithmetic scale charts gives an impression that the Sensex has not given much return in early years and has started delivering only in the later years. However, that is not true and the return during the first 15 years was better compared to the last 15 years. For example, the Sensex grew from 679 points in March 1989 to 5,529 points by March 2004, an absolute gain of 714 per cent. Absolute Sensex returns between March 2004 and March 2019, was only 597 per cent. And the logarithmic scale chart was able to capture this differential performance accurately.