Moving averages: reading a trend
The single most common tool on a trader's chart, and what it can and can't tell you.
What a moving average is
A moving average is the average closing price over the last few days, recalculated every day. A 5-day average (MA5) follows the price closely; a 20-day average (MA20) is slower and smoother. Averages iron out daily noise so you can see the direction underneath.
Stacked averages = a trend
Trend-followers look at how the averages are stacked. When the short one is above the medium one and that is above the long one (MA5 > MA10 > MA20), recent prices are higher than older prices: an uptrend. Stacked the other way (MA5 < MA10 < MA20) is a downtrend. Tangled together means sideways.
A golden cross is when a shorter average crosses above a longer one (a trend may be starting); a death cross is the opposite. Many traders watch the 50-day and 200-day averages for this.
Don't chase, and 'support'
The tool our TrendBot copies measures bias: how far the price is above its 5-day average. Its rule is "don't chase": more than 5% above the average scores low, because prices that run far ahead of their average often fall back.
Support is a price level where buyers have tended to step in, such as a rising moving average. A price that dips to its 10-day average and bounces is said to be 'holding support'.
The catch
Moving averages only describe the past. They lag: by the time the averages line up, much of the move may already have happened, and in sideways markets they flip back and forth, giving false signals.
A stock closes at $606. Its 5-day average is $612, its 10-day $594 and its 20-day $570.
612 > 594 > 570, so the averages are stacked upward: an uptrend. The price is about 1% below its 5-day average, a small dip in an uptrend, which trend-followers call a 'pullback' rather than a reason to panic.
Key terms
- Moving average (MA)
- The average closing price over the last N days, updated daily.
- Golden cross / death cross
- A shorter moving average crossing above / below a longer one.
- Support
- A price level where buying has tended to stop declines, such as a rising average.
- Lagging indicator
- A measure built from past prices, so it confirms moves after they start.
Moving averages describe the trend so far, clearly and simply, but they can't tell you what happens next.