BY STEVE SJUGGERUD
I feel snookered,” Mark wrote in to tell us. “I believe this has a negative effect on the unsuspecting investor.”
What was Mark’s beef?
He doesn’t like the way I do charts.
Let’s look at this chart… What do you see?
Now, please, take a look at this chart… What do you see?
To me, this second chart is a much better chart. It shows history in its proper light.
For example, the greatest stock market crash in history started in October 1929. Stock prices fell over 89% from peak to trough – the worst fall in stock market history.
On the first chart, the Crash of 1929 barely shows. But on the second chart, the Crash of 1929 really looks like what it was: the greatest crash in history.
Most charts are like the top chart above… with just straight numbers (or points or dollars) on the right-hand scale. What’s wrong with that?
Well consider this… A 20-point move in stocks in 1929 would have been a massive move – more than a 50% move in stock prices. But that same 20-point move today would barely be news. It’s just over a 1% move in stock prices.
The right way to see this is not with points on the chart, but with something that takes percentage changes into account.
The scale on the second chart is based on percentage moves… Every number on the scale is 100% higher than the previous number. (The scale goes 5, 10, 20, 40, and so on.)
Subscriber Mark doesn’t like that way of doing it… He complained that that way of doing it “cuts down on your ‘visual’ understanding of the rise. Yes, you can see a percentage gain, but you lose the ability to notice a parabolic move that might make you want to ‘jump in’ on a short term trade.”
Mark, you are correct – “parabolic” moves don’t look the same in these two different styles.
And my opinion is, if seeing a chart the other way somehow helps your trading, then more power to you. You can easily find charts on the Internet that have this “standard” spacing on the vertical axis.
I am not against the other chart style. Sometimes, it’s the right one to use, actually.
But I don’t want to see what we call a “hockey stick” chart – a chart that does nothing for a while and then goes straight up – like that first chart above. With that kind of chart, you lose all the historical perspective.
The goal of our percentage-scale charts (known in statistics as “log scale” charts or “logarithmic” charts) isn’t to “snooker” you. It is just the opposite. These charts give you the most accurate picture of what’s happened – past and present.
The next time you see a crazy-looking stock chart… a “hockey stick” chart that goes from flat to vertical… remember to check the scaling. Otherwise, it may not be telling you the truth…
Again, we want the chart that shows the truth. When you’re looking at historical prices, the percentage-change charts we use are the closest to the truth…
Mark, I hope this makes sense… I hope you learned something… and I hope you can use this knowledge going forward.