Moving averages

After this lesson you can use the standard moving averages the way professionals do, and you'll know exactly what an average can't tell you.

Smoothing the noise

A moving average (MA) is the average closing price over the last N bars, recomputed each bar and drawn as a line. The 50-day MA on today's chart is the average of the last fifty daily closes; tomorrow the window slides forward one day. That's the whole construction. (A variant, the exponential moving average or EMA, weights recent bars more heavily so it turns faster; the plain version is the simple moving average, SMA. The differences are small at this stage, so pick a convention and stay consistent.)

The standard set, each with a job:

• 10-day and 21-day — short-term trend. Fast movers in strong advances often ride the 10-day or 21-day, touching and bouncing.
• 50-day — the intermediate trend, and the most-watched line in growth-stock trading. Healthy Stage 2 advances typically hold it; pullbacks to a rising 50-day are the classic "second chance" area (School V returns to this as an entry type).
• 200-day — the long-term divide. (On a weekly chart that's the 40-week; Weinstein's stage work uses the faster 30-week, about 150 trading days.) Price above a rising 200-day is the crude, robust definition of a long-term uptrend, and the stage framework from course 2 leans on it.

Two readings matter more than the lines themselves. Slope: if the line is rising, the trend it measures is up. Stacking: when the 10 sits above the 21, above the 50, above the 200, and all are rising, every timeframe's trend agrees. That alignment is the textbook portrait of a healthy Stage 2. When the stack tangles, with lines crossing and price whipping through them, you're looking at a range or a top, and trend techniques stop working there.

What the average can't do

An MA is arithmetic on the past, and there's nothing about tomorrow inside it. When you hear that the 200-day "acted as support," the mechanism is the one from course 3. Enough professionals watch the same famous lines that orders cluster near them, and the clustering is what makes the line matter.

That also points at the failure mode. In a sideways range, price crosses the averages constantly, and every crossing that would have been a signal in a trend is noise here. Traders who learn MAs in a trending market and keep applying them in a range hand over the difference in commissions and small losses. An average only describes what has already happened, and whether the description is worth acting on this month depends on the stage (course 2).

One more habit worth building now: an average's distance is information too. A stock 40% above its own 200-day has stretched far from its long-term price. Nothing says it must snap back, but School IV's screening course will make "how extended?" a standard question, and School II already told you what a far-away stop does to your position size.

Check yourself

1. Price is above its 50-day, the 50-day is rising, and the 10/21/50/200 are stacked in order. Describe the situation in stage language. (Textbook Stage 2 — all measured trends agree and point up.)
2. Why does the 200-day "work" as support so often? (Its audience. Enough professionals watch it that orders cluster there — the memory mechanism from course 3, organized around a famous line.)
3. Your MA signals worked beautifully for six months and now whipsaw constantly. What most likely changed? (The stock left its trend and entered a range. An average describes a trend, and in a range there's no trend to describe, only noise.)

The idea this lesson installs

The slope of the average is the trend's plainest measurement.

Next: Course 6 — "Volatility: the stock's own units."