Ask Colin

You use weekly and monthly charts. How are they constructed?

The detailed question was:

I first of all wish to thank you for sharing your knowledge and thoughts regarding investing with us. I enjoy reading your thoughts and thinking whether your ideas would suit my investment targets and hence implementing into my investment plan.

 

I have some knowledge  in excel programming but not much. I am currently writing an charting  program for my own use which I feel may have some advantages over the currently available programs for my style of investing (not trading).

 

My question arises from my understanding ( or misunderstanding ) that you use mainly monthly and weekly charts. Are these charts that you use, the price of security on a given day and compares the price of that security on the same day in the previous week or month( Depending on time frame)? Ie if today is a tues then you use the price of the security on the previous week’s Tues ? Or do you use the method  If today is tues it compares the price of the security today compared to the average of the last 5 days ( 5 business days in week)? Obviously the latter is a 5 day simple moving average. Could you explain which method  does your charting software use and why you would favour that method over the other?

 

I am sorry if this is a stupid question but I would be interested in your thoughts on which you use and why ?

 

Modern stock markets trade over a day as a series of prices at which transactions take place: eg $2.30, $2.31, $2.29…

 

Bar charts are a condensation, or summary of price action over a period of time. Thus a bar chart can be for one minute, several minutes, an hour, several hours, a day, a week, a month, a quarter or even a year.

 

The most common way in which a bar chart summarises the series of transactions is to plot four prices for the time period: The opening price, high price, the low  price and the closing price.

 

You have asked how weekly and monthly bar charts are created, but in principle it is the same for every bar for any period longer than the minimum, which is usually one minute. The bars can be formed through the day with intra-day data streams, but for my purpose as an investor, I only get data daily.

 

So, for any (five-day) week, at the close of Monday we have a bar for the week that is identical to Monday’s daily bar. The opening price for Monday is also the opening price for the week and will not change again during the week. Monday’s high, low and close prices will at that point be also the high, low and close prices for the week so far.

 

On Tuesday, we will most likely get different high, low and close prices to Monday. If the Tuesday high is above Monday’s high, it becomes the week high. The same for the low and the close. So, each day, the weekly bar may change until the close on Friday, when it is finalised.

 

The same process creates the monthly bar through the month.

 

So, at any time during the week and month, we have a bar that shows us the price action for the week and month to date.

 

That is the more or less industry standard method. However, I have seen charting software that takes the current week as ending today (ie on Wednesday it is last Thursday to this Wednesday’s data). Then it recalculates all the past data for corresponding Thursday to Wednesday weeks and plots it.

 

There is nothing inherently wrong with this or right with the generally accepted method. It all depends on what you are trying to do. It is important that whatever method you choose, you then test how your investment methods work on it. One of the disconcerting things about partial weeks or shifting weeks is that indicator signals can appear then disappear because they are usually based on the close, but this will also afflict indicators using other prices. No matter what you decide to do, test it and make sure you understand what is happening to the underlying algorithms.

 

As an aside, charting software is not expensive and even free. I have seen many people set out to reinvent something already available and few persist with the effort. You need to have a very individual need that nobody has not already implemented in software for it to make sense to me. I don’t want to talk you out of it, but give it careful thought. It is not the chart you use, but the analysis of the businesses you invest in and the decisions you make which generates superior investment returns.

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