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Question Of The Week - 3/24/2010 |
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Question:
On two charts of the same market (one arithmetic, one logarithmic), the extended wave is a different wave depending on which chart I use. Which chart should I trust?
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Answer:
When it comes to finance, the most important things are measured in percentages (i.e., interest rates, return on investment, yield). Since everyone is working with different amounts of capital, the important variables are quoted in percentages. When it comes to stock and commodity market behavior, price relationships based on percentages will always be more accurate. As a result, if left with a conflict between which leg is the longest on two separate charts, always trust the information on the LOG chart over that of the arithmetic chart. Arithmetic charts are easier to work with, but provide less accurate representations of reality.
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