Stock prices jump up and down every single day. To see the actual trend, without all the noise, analysts use a moving average. This is a line that shows the average price over a specific period, such as the last 200 days.
"There is no obstacle that cannot be overcome."
— Florence Scovel Shinn
On the chart, this line often acts as an obstacle (resistance) or a floor (support). If the stock price is above the 200-day average, we say the trend is long-term positive. If it is below, the trend is negative.
Important signals
Golden Cross: This is a famous signal where a short moving average (e.g. 50 days) crosses ABOVE a long one (e.g. 200 days). It is considered a very strong buy signal!
Advantages
- Makes it easy to see the overall trend in a second.
- Helps you avoid buying stocks that are in a long-term downtrend.
- Can be used to set smart stop-loss levels.
Disadvantages
- It is a lagging indicator. It tells you what has happened, not what will happen.
- Works poorly when the stock market moves sideways in a flat market.