Must-Read for New Stock Traders | What is a Moving Average? Confused by the K-line chart when you first enter the stock market? Don’t worry, understanding moving averages is a key step in advancing your stock trading skills!
🤔 What is a Moving Average?
A moving average (MA) is a line that connects the average closing prices over a certain period. It acts like a “smooth curve,” filtering out short-term fluctuations and helping us see the price trend, like equipping stock prices with a “trend magnifying glass”! For example, if a stock's closing prices over the last 5 days are 11 yuan, 12 yuan, 13 yuan, 14 yuan, and 15 yuan, the 5-day moving average on the 5th day is: (11 + 12 + 13 + 14 + 15) ÷ 5 = 13 yuan, and connecting these average values forms the 5-day moving average curve.
🌟 Two Core Uses of Moving Averages
Determining Price Trends
Golden Cross: When the short-term 5-day moving average crosses above the long-term 20-day moving average, forming a golden cross, it indicates strong buying intent, and the stock price may rise.
Death Cross: When the 5-day moving average crosses below the 20-day moving average, forming a death cross, it is a typical sell signal, and the stock price may fall.
Finding Support and Resistance Levels
Support Level: When the stock price falls and touches a lower moving average (e.g., 250-day moving average) without breaking below it, it's like having floor support, and there is hope for a subsequent rise.
Resistance Level: When the stock price rises and encounters an upper moving average (e.g., 250-day moving average) without effectively breaking through, it's like hitting a ceiling, and the upward momentum may be hindered.
🛑 Using Moving Averages to Determine Stop-Loss Points
5-Day Moving Average (Attack Line): A lifeline for ultra-short-term or strong stocks; if it falls below this level, the short-term trend may end, and it’s time to decisively cut losses.
10-Day Moving Average (Market Line): If the 5-day moving average is breached without timely loss-cutting, this serves as a second line of defense; a breach requires caution.
20-Day Moving Average (Support Line): A warning line for swing traders; if breached, it may indicate that the market is entering an adjustment phase.
30-Day Moving Average (Lifeline): A critical turning point for trends; if breached, it suggests the market is weakening or entering a consolidation zone.
60-Day Moving Average (Decision Line): A moving average that institutions and major players pay attention to; if breached, significant short-term movements are unlikely.
120-Day Moving Average (Trend Line) & 250-Day Moving Average (Year Line): Represents long-term trends, suitable for medium to long-term investors to reference the market's general direction.
While moving averages are not infallible, they can help us make clearer judgments on our stock trading journey!