Ask Colin

How can you have a 260 day moving average on a monthly chart?

There is a difference between the calculation and the display, which are two different things.

Most databases of stock prices or index values are maintained in days.

That data can be displayed as daily bars, which uses each record in the database.

Or, it can be displayed as weekly bars, in which case the software finds the first price for the week, the highest price for the week, the lowest price for the week and the last price for the week and constructs each bar.

Or, it can be displayed as monthly bars, in which case the software finds the first price for the month, the highest price for the month, the lowest price for the month and the last price for the month and constructs each bar.

When it comes to drawing a moving average, we have a choice of whether we draw it based on the daily close (260 days), or the software can find the last price in each week (52 weeks), or the software can find the last price in each month (12 months). While the resulting moving average lines will be subtly different in each case, they will be essentially the same, which can be easily demonstrated by drawing the three lines and overlaying the three charts.

Now, different software will deal with this process somewhat differently. In Insight Trader, which I use, it is possible to have daily data displayed as a monthly chart, but used to calculate a 260 day moving average. It can also be manipulated so that the daily data is compressed to monthly format and then it is only possible to construct the moving average as a 12 month moving average.

Other software will deal with the process differently and it will be necessary to understand how the software you use handles the data in deciding what period you should choose for the moving average.

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