Mechanics and Dynamics of Charting
If PN represents the Nth price, then ratio scaling simply means that:(P P )/PN− N 1 N 1−−is a constant for every equal distance move on the chart. Figures 3.17 and 3.18
show how the percentage increments need to rise to account for an equal price
change. This formula represents what is also referred to as stock returns.
The ratio scale tends to compress price action at higher prices and expand it at
lower prices, whereas linear scaling represents price evenly across the entire price
range. Consequently, for very large price differences, linear scaling will not rep-
resent price activity clearly at lower prices due to the ever‐increasing price range
that is made to fit on one chart. But it would reveal upper price activity with better
clarity when compared to ratio scaling, which tends to compress upper price ac-
tion, making it relatively more difficult to observe price patterns and volatility be-
havior. But a log scale would reveal lower price action with more clarity. In short:■ (^) Linear scaling provides better upper end definition and visualization of prices,
but relatively poorer clarity at lower prices.
■ (^) Ratio scaling provides better lower‐end definition and visualization of prices,
but relatively poorer clarity at higher prices.
As a general guideline, use linear charts when the price range under observa-
tion is relatively small. For stock price ranges exceeding $100, it may be more
appropriate to use ratio charting. It is also best to employ ratio charts for viewing
figure 3.17 Ratio Scaling.
figure 3.18 Ratio Scaling.