Using Log Prices, Log Returns, and Log Volatility to Read Markets

Summary

This indicator guide explains how logarithmic transformations can express price behavior in relative rather than absolute terms. It distinguishes a log price, calculated as the natural logarithm of the close, from log returns, calculated as the difference between consecutive log prices, and from log volatility, defined as the standard deviation of log returns over a chosen bar window. The guide argues that log charts better represent percentage growth across assets whose prices have changed greatly over time, and that log returns let traders compare relative price movement across different price levels.

It also proposes log volatility as a way to describe percentage-based market noise and regimes. The text says low readings can precede breakouts and sharp spikes can accompany exhaustion or panic, but supplies no test, asset-specific calibration, or evidence for those interpretations. Its example that a volatility reading of 0.02 corresponds to roughly 2% movement per bar depends on the calculation and data frequency. These measures provide a consistent scale for analysis, but the guide does not specify trading rules or establish predictive performance.

Key ideas

• Log prices represent proportional changes more clearly than absolute price differences over long histories.
• Log returns are differences between consecutive natural log prices and measure relative price movement.
• Log volatility is the standard deviation of log returns over a selected number of bars.
• The guide associates low volatility with possible breakouts and spikes with panic or exhaustion, without presenting supporting tests.
• Interpretation depends on the selected window and bar frequency.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.