Logarithmic Prices

 

Logarithmic charts allow traders to better distinguish between trending and ranging environments. Exponential charts inherently place more emphasis on changing prices by reflecting exponential changes rather than the linear price movement.

The most common way to show a logarithm is to decide which base number to use. The more mathematically inclined gravitate towards Euler’s number e. Most people unfamiliar with logarithms prefer base 10. It feels more intuitive.

We’re talking about math stuff, so allow me to bring it down to a more friendly level. The process of following logarithmic prices means following the exponent of the number. That’s what I mean by the exponential change.

Taking my favorite example of the EURUSD, the current price of the EURUSD is approximately 1.3000. If you take the natural logarithm, that becomes ln(1.3) = 0.2623, which is not terribly informative. It just looks like the calculator spits out a number. It may help to realize what the number shows. e0.2623=1.3000. The 0.2623 is just the exponent.

Base 10 works the same way. Log10(1.3) = 0.1139. Representing the number as an exponent, the trader can think of the current price as 100.1139= 1.300. Ten is the base number risen to a certain exponent. The result is the current price.

As the price rises, the exponent will change. However, it takes an increasing amount of price movement to get the logarithmic price to budge. The differences are usually not very clear between individual bars. The point of the exercise is to allow traders to distinguish between long term trends versus a drifting price.

Charting packages offer logarithmic charts to visually represent the exponential change. They typically display different distances between different price ticks. The difference between 1.20 to 1.25 is larger than the distance between 1.25 to 1.30.

As cataclysmic events like Enron unfold, the logarithmic chart exaggerates the move by making the earlier trends appear bunched together, whereas the free falling stock price sticks out even more than on the linear chart.

A great stock like Disney, which appears in the video, exhibits the opposite behavior. The price looks dead in the water for years until it exploded upwards over the past year or more. When viewed on the logarithmic chart, the price rise tends to look less exciting. It mutes blow off top and makes them appear more like a consistent trend.

MetaTrader, for some unknown reason, does not even offer logarithmic charts. NinjaTrader offers logarithmic charts buried under an obscure menu.

Logarithmic charts in NinjaTrader

Changing charts from linear to logarithmic is very simple in NinjaTrader, once you know where to look. Special thanks go to koganam on the NinajTrader forum and Walker England for suggestions on this topic.

  1. Open a chart in NinjaTrader
  2. Right click anywhere on the vertical price axis. The wrong menu will appear if you do not click on the price axis
  3. Select properties
  4. Change the chart type to Logarithmic
 

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About the author

Shaun is a passionate and proud nerd on a wide variety of topics, most of which have absolutely nothing to do with each other. He loves math and systems, which makes him a natural fit for designing trading systems. The most random fact about him is that he speaks fluent Arabic.Shaun's hobbies are running, church and spending as much time as possible with his wife and two young boys.

 
 

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