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THE HAnDbOOk Of TECHnICAL AnALySIS

In linear scaling, equal distances on the chart represent equal price chang-

es. This would imply that equal price changes at higher prices would result

in lower percentage changes. For example, a price change from $10 to $20

would represent a $10 change in price and a 100 percent change in price, that

is, ($20−$10)/$10 × 100 percent. A price change from $90 to $100 would also

represent a change of $10 in price but at this higher price level, its percentage

change is merely ($100−$90)/$90 × 100 percent = 11.1 percent. Hence, for

linear scaling, the percentage change is not preserved for equal units of price

change.

If PN represents the Nth price, then linear scaling simply means that:

(P P )N− N 1−

is a constant for every equal distance move on the chart. See Figure 3.16.

In ratio scaling, equal distances on the chart represent equal price percentage

changes. This would imply that equal percentage changes at higher prices would

result in larger price changes. For example, an equal percentage change of

100 percent based on a price change from $10 to $20 would require a price

change of $90 at the $90 price level, that is, the price difference between the $180

and $90 price level. Hence for ratio scaling, the price change is not preserved per

equal units of percentage change. This also means that equal distances on the

chart does not equate to equal percentage changes.

figure  3.15 Comparing Three‐Line Break with Renko Charting on the Currency Shares Euro
Trust.
Courtesy of Stockcharts.com

figure 3.16 Linear Scaling.