Essential for Beginners: Introduction to Moving Averages

New to the stock market and confused by candlestick charts? Learn about moving averages to advance your trading without worries.

Concept of Moving Averages

A moving average (MA) is a line that represents the average closing price over a specific period. It can filter out short-term fluctuations and show price trends, acting like a “trend magnifier” for stock prices. 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, forming a 5-day moving average curve.

Two Core Uses

Trend Judgment

- Golden Cross: The 5-day moving average crosses above the 20-day moving average, indicating strong buying intent, and the stock price may rise.

- Death Cross: The 5-day moving average crosses below the 20-day moving average, a typical selling signal, and the stock price may fall.

Support and Resistance Levels

- Support Level: When the stock price falls and touches the lower moving average (e.g., the 250-day moving average) without crossing below it, it may rebound afterward.

- Resistance Level: When the stock price rises and encounters the upper moving average (e.g., the 250-day moving average) without breaking through, the upward momentum may be hindered.

Moving Average Stop-Loss Reference

- 5-day moving average (Attack Line): The lifeline for very short-term or strong stocks; if it breaks, it indicates the end of the short-term trend, and decisive stop-loss should be taken.

- 10-day moving average (Market Line): If the 5-day moving average is broken without a stop-loss, it serves as a second line of defense, and caution is needed if it breaks.

- 20-day moving average (Auxiliary Line): A warning line for swing trading; if broken, it indicates a market adjustment.

- 30-day moving average (Lifeline): A turning point for trends; if broken, it could indicate a weakening market or a shift into consolidation.

- 60-day moving average (Decision Line): Monitored by institutional investors; if broken, significant short-term movements are unlikely.

- 120-day moving average (Trend Line) and 250-day moving average (Annual Line): Suitable for medium to long-term trading, capturing long-term trends.