A moving average is "everyone's average cost"
A moving average (MA) is simple: add up the closing prices of the last N days and divide by N.
- 5MA (weekly) = the average cost of everyone who bought in the past week
- 10MA (two weeks)
- 20MA (monthly) = the past month
- 60MA (quarterly) = the past quarter
So when a price sits above the 20MA, it means "on average, everyone who bought in the past month is in profit". When it falls below the 60MA, it means "on average, everyone who bought this quarter is underwater". That is why moving averages are used to judge strength — they reflect the position of market participants.
Why bullish alignment matters
When the averages line up as 5MA > 10MA > 20MA > 60MA, that is "bullish alignment". It means:
- The more recent the buyers, the higher their cost — yet they are still willing to buy
- Price has been stepping up steadily, not spiking once
- Short-, medium- and long-term holders are all in profit, so selling pressure is relatively light
This structure typically shows up in trending stocks, which is why the "Strict bullish" condition in the Watchlist Strategy is looking for exactly this.
Conversely, bearish alignment (5MA < 10MA < 20MA < 60MA) means price has been falling, so those who bought earlier have higher costs and larger losses. Any bounce runs into their break-even selling.
Convergence: the calm before the storm
When all four averages converge into a narrow band (defined in this app as within 5%), it means participants from different periods have roughly the same cost — the market is deadlocked with no direction.
That state rarely lasts long. Once it breaks, a clearer move usually follows. Some traders specifically look for converging stocks and wait for the direction to be confirmed before entering.
Why is a pullback to the MA a buy point?
Strong stocks do not rise every day; they consolidate along the way. When price pulls back to a moving average after a run, it is often seen as a relatively safe entry because:
- The MA provides a psychological support level based on "the crowd's cost"
- You are not chasing the very top, so risk is more controllable
That is exactly what the Pullback Buy Points feature does: find stocks whose close is within ±3% of a chosen MA. Pick the average that matches your holding period — 10-day for short-term, 20- or 60-day for swing trading.
But remember
Moving averages are lagging indicators — they are calculated from past prices and cannot predict the future. On major news or a sharp sell-off, MA support simply breaks.
Their value is in giving you discipline and a framework, not in guaranteeing profit. Any condition should be judged together with your understanding of the industry and fundamentals.