THE HAnDbOOk Of TECHnICAL AnALySISvery long‐term market action. This mainly applies to the equity markets. For
charts based on futures or foreign exchange contracts, including any instrument
being traded on very low margin (i.e., very high leverage), linear charts would be
more suitable, as ratio charts would compress price too much at higher prices.
When applying technical analysis to price, the type of scaling may affect the
forecasting of potential support and resistance levels, introducing inconsistencies
and discrepancies in the forecasted levels of potential price reaction. This affects all
overlays that rely on geometry in their construction such as trendlines, channels,
and chart patterns. Consequently, if the scaling changes, the angles of all trend-
lines will also change accordingly, indicating different levels of potential support
and resistance. Scaling does not affect overlays that are constructed numerically
like moving averages and price envelopes. It also does not affect overlay indicators
that indicate horizontal levels of support and resistance, like:
■ (^) Prior support and resistance levels
■ (^) Fibonacci extensions, retracements, projections, and expansions
■ (^) Gann one‐eighth and one‐third price retracements
■ (^) Gann Square of Nine price projections
It should be noted that if square root scaling is employed, it will indicate an
uptrend line penetration that is later than that for ratio scaling but earlier than an
uptrend line penetration based on a linear scale. This is rather disconcerting, as
the majority of traders will react to violations of the uptrend line based on either
linear or ratio scaling. Hence, a trader utilizing square root scale charting will find
him- or herself initiating entries and exits either too early or too late with respect
to important and significant price reaction levels in the market.
Insofar as drawing uptrend and downtrend lines using linear and ratio scaling,
it behooves the practitioner to note the following:
■ (^) Uptrend lines are penetrated sooner while downtrend lines are penetrated lat-
er on ratio or logarithmically scaled charts
■ (^) Uptrend lines are penetrated later while downtrend lines are penetrated soon-
er on linear or arithmetically scaled charts
See Figures 3.19 and 3.20.
Switching between linear and ratio scaling may also result in the following:
■ (^) Declining prices may take on a potentially bearish appearance with prices ac-
celerating as they decline in a convex‐type fashion, resembling a downward
parabolic move on ratio or logarithmically scaled charts
■ (^) Rising prices may take on a potentially bearish appearance with prices decel-
erating as they rise in a concave‐type fashion, resembling a flattening out or
rounding top formation on ratio or logarithmically scaled charts
■ (^) Declining prices may take on a potentially bullish appearance with prices de-
celerating as they decline into a concave‐type fashion, resembling a flattening
out or rounding bottom formation on linear or arithmetically scaled charts