Why are weekends ignored when calculating moving averages?
Why are weekends ignored when calculating moving averages?
Loading saved threads...
Flux · External communityPost link
External question — Personal Finance Stack Exchange
Author: Flux
Original post: https://money.stackexchange.com/questions/144551
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
Suppose we are calculating a 5-day simple moving average (SMA) of a stock's closing price:
If it is now the end of the trading day on Friday, we can calculate the SMA using the closing price on Friday, Thursday, Wednesday, Tuesday, and Monday. The total time period covered by the calculation is 4 days (Monday close to Friday close).
If it is now the end of the trading day on Monday, we can calculate the SMA using the closing price on Monday, Friday, Thursday, Wednesday, and Tuesday. The total time period covered by the calculation is 6 days (Tuesday close to Monday close).
Notice the difference in the total time period covered by each calculation. Isn't there a problem with this inconsistency?
The difference between the closing price on Thursday and the closing price on Friday represents the price change over 24 hours (1 day). However, the difference between the closing price on Friday and the closing price on Monday represents the price change over 72 hours (3 days). Presumably, the average price change between Friday and Monday is greater than the average price change between any other two consecutive trading days, because the Friday-Monday gap is 3 days instead of the usual 1 day.
The problem gets even worse when there are holidays. For example, when calculating a 3-day SMA over a 3 day long weekend, the time period covered by each average calculation ranges from 2 days to 5 days.
In light of the inconsistent time periods explained above, why do technical analysis software and literature seem to ignore the problems caused by weekends and holidays when calculating moving averages?
Quote
Report
TooTea · External communityPost link
External answer — Personal Finance Stack Exchange
Author: TooTea
Original post: https://money.stackexchange.com/a/144552
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
Because stocks don't trade on weekends.
Why should the average price change between Friday and Monday be any different from the price change for any other two consecutive trading days? Most if not all markets are closed on weekends and holidays. Whatever happens on Saturday and Sunday will be acted upon once the markets open on Monday morning.
For the purposes of analysis, weekends and holidays pretty much don't exist. It's as if somebody hit a big Pause button Friday afternoon and then unpaused it again on Monday morning.
The total (calendar) period will thus differ, but the number of trading days will be the same for any position of the sliding window. If you did it the other way around, there would always be an artificial dip in observed volatility for windows that overlap a weekend.
Quote
Report
Bob Baerker · External communityPost link
External answer — Personal Finance Stack Exchange
Author: Bob Baerker
Original post: https://money.stackexchange.com/a/144553
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
If it is now the end of the trading day on Friday, we can calculate the SMA using the closing price on Friday, Thursday, Wednesday, Tuesday, and Monday. The total time period covered by the calculation is 4 days (Monday close to Friday close).
For starters, your premise is wrong. A daily bar represents a one time period from the opening of trading to the close of trading. A full week's trading (Monday to Friday) represents five such days so the time period covered by the calculation is 5 days not 4. To repeat, one reading represents ONE day of trading.
A moving average is a mathematical calculation of a subset of data points in a full set of data. Typically, this was done on daily data but traders reduce the time preiod to as short as one or five minute bars. With no trading on Saturday or Sunday, there are no data points on those days. Therefore, non trading days are not considered to be part of the data set and therefore they are ignored.
If it is now the end of the trading day on Monday, we can calculate the SMA using the closing price on Monday, Friday, Thursday, Wednesday, and Tuesday. The total time period covered by the calculation is 6 days (Tuesday close to Monday close).
This is more of the same off the rails reasoning. This would be as silly as asking you to calculate a 5 minute moving average for a day when there is no trading.
The short answer is that you have created an alternative interpretation of what a moving average is and that interpretation is incorrect.
Quote
Report
Post Reply
Quoted from Forex.com.bd-Editorial External question — Personal Finance Stack Exchange Author: Flux Source score (net votes, not local likes): 0 Original post: https://money.stackexchange.com/questions/144551 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Suppose we are calculating a 5-day simple moving average (SMA) of a stock's closing price: If it is now the end of the trading day on Friday, we can calculate the SMA using the closing price on Friday, Thursday, Wednesday, Tuesday, and Monday. The total time period covered by the calculation is 4 days (Monday close to Friday close). If it is now the end of the trading day on Monday, we can calculate the SMA using the closing price on Monday, Friday, Thursday, Wednesday, and Tuesday. The total time period covered by the calculation is 6 days (Tuesday close to Monday close). Notice the difference in the total time period covered by each calculation. Isn't there a problem with this inconsistency? The difference between the closing price on Thursday and the closing price on Friday represents the price change over 24 hours (1 day). However, the difference between the closing price on Friday and the closing price on Monday represents the price change over 72 hours (3 days). Presumably, the average price change between Friday and Monday is greater than the average price change between any other two consecutive trading days, because the Friday-Monday gap is 3 days instead of the usual 1 day. The problem gets even worse when there are holidays. For example, when calculating a 3-day SMA over a 3 day long weekend, the time period covered by each average calculation ranges from 2 days to 5 days. In light of the inconsistent time periods explained above, why do technical analysis software and literature seem to ignore the problems caused by weekends and holidays when calculating moving averages?
Checking account access…