V.7:1 (16-20): Logarithmic point and figure charts by Luis Ballesca Loyo

Logarithmic point and figure charts by Luis Ballesca Loyo

During the early development of technical analysis, almost all types of graphing methods used the arithmetic values of prices for charting. Not so long ago, it became a common practice to construct charts or graphs using a logarithmic scale. Experience has shown me that this proportional scale has many advantages over the arithmetic method when it comes to analyzing price formations and market tendencies.

Actually, using point and figure charting clearly shows the difference between graphing on the arithmetic scale and graphing on logarithmic scale. When using an arithmetic scale as in Figure 1, every X and O corresponds to an equal, nominal amount of change in price. That is, every X and O represents an equal change in dollars.

When using a logarithmic scale, we chart the proportional, not nominal, change in price. However, by charting proportional variations in price change, we face the problem of having to change the scale often to maintain proportionality. This is a tedious and nearly impossible task, though some interesting variable-scale strategies have been developed.

To overcome this proportionality problem, I chart the values using a proportionality criteria for the box size and reversal patterns, as shown in Figure 2. This way, every X and O corresponds to an equal and proportional change in price. That is, every box represents an equal percentage change.