Trading Basics Everyone Should Know (#1): The Log Scale
Let’s look at these charts:
BTC from 2013 to date
This is what you see every day on the internet, even on most exchange trading charts.
The drop in the past 7 months certainly looks huge, and every day you’ve heard about the BTC “bubble.”
While the chart is not wrong, it is misleading.
Now look at the same BTC price chart in a different, correct, perspective::
This is exactly the same chart. The recent drop looks very normal, given the higher growth starting the beginning of 2017.
Interestingly, now you can see that BTC price could reach $35,000 by 2021.
The key to understand BTC, or any other securities’, price movement is the logarithmic chart. A logarithmic scale is a nonlinear scale used when there is a large range of quantities. Common uses include earthquake strength, sound loudness, light intensity, and pH of solutions. But it is particularly useful in trading.
It is based on orders of magnitude, rather than a standard linear scale, so the value represented by each equidistant mark on the scale is the value at the previous mark multiplied by a constant.
Why you should use log scale for trading
A logarithmic unit is an abstract mathematical unit that can be used to express any quantity that is defined on a logarithmic scale, that is, as being proportional to the value of a logarithm function.
When BTC is trading around $8,000, a drop of $200 is different when it was $1,000. It is a much smaller proportional drop.
A good trader builds his trading system based on a proportional scale, a percentage (%), rather than the actual dollar amount.
*Disclaimer: This is not a recommendation to invest, nor can this be considered an investment advisory service. No money changes hands that will benefit IOB as a result of this post. Full disclosure: We long BTC and ETH at the time of the publication.