What Is the 50-Day Simple Moving Average in Trading? And What Does it Mean?
Introduction to the 50-Day Moving Average
In the realm of stock trading, where fortunes can be made or lost in seconds, reliable indicators are your best friend.
And the 50-day moving average is the single most popular technical analysis indicator in existence.
Today, we’re going to explore what the 50-day moving average is, why it’s so popular with traders, its pros and cons, and how you can incorporate it into your trading strategy.
Definition of the 50-Day Moving Average
Before we dive into specifics, let's cover the basics.
What is a moving average? A moving average is an indicator that smooths out the price action of an asset by calculating its average closing price over a specific time period.
The 50-Day Moving Average is the average of the closing prices of a stock, index, ETF, or other asset over the last 50 days.
This average is plotted on a chart and produces a line that traders use to identify the stock's intermediate trend.
Here is a chart of SPY with its 50-day moving average:
The 50-day moving average is also called the 50-day simple moving average or 50-day SMA for short.
There is another type of moving average called an exponential moving average (EMA) which more heavily weights recent prices in the moving average.
For the purpose of this article, we will focus on the 50-day simple moving average.
Why the 50-Day Moving Average is Popular
Balanced View
Unlike shorter time-frame averages like the 20-day moving average or longer ones like the 200-day moving average, the 50-Day SMA provides a balanced, intermediate view. It captures enough of the recent price action to be relevant but also includes enough data to minimize noise and false signals.
Ease of Understanding
Like all simple moving averages, the 50-Day SMA is very easy to understand.
Institutional investors, retail traders, and market analysts all pay close attention to this indicator because it’s so easy to understand.
Versatility
The 50-Day SMA is a Jack-of-all-trades. Whether you're trend-following, swing trading, or employing a momentum strategy, this indicator fits neatly into various trading plans and works well in conjunction with other indicators.
Pros of Using the 50-Day Moving Average
It’s Key for Intermediate-Term Trend Analysis
The 50-Day SMA shines when it comes to identifying medium-term trends.
This is helpful to the large population of traders and investors who need something in between day trading and multi-year long-term investing.
It Can Be Support and Resistance
Like its 20 and 50-day siblings, the 50-Day SMA can serve as a vital level of support or resistance.
When a stock is trading above its 50-Day SMA, the line can act as a marker of sorts, indicating a level where the stock may find support.
Here is an example of JP Morgan (JPM) finding support at the 50 day.
Conversely, when a stock is trading below, it can act as a ceiling or resistance level.
Ease of Understanding and Access
The 50-Day Moving Average isn't a complicated indicator like MACD or Bollinger Bands..
It’s easy to understand, and it’s also available on every charting platform, including free ones.
Cons of Using the 50-Day Moving Average
Potential for False Signals
No indicator is perfect, and the 50-Day SMA is no exception.
It can generate false signals, and there is no guarantee it can serve as effective support or resistance.
For example, here is Tesla (TSLA) slicing through the 50-day like a hot knife through butter:
Not Ideal for Very Short-Term or Very Long-Term Analysis
The 50-Day SMA isn't particularly helpful for traders and investors on ultra-short-term or long-term horizons.
How to Use the 50-Day Moving Average in Trading
Buy/Sell Signal Generation
The most straightforward use is to look for crosses above or below the 50-Day SMA. A move above can be a bullish sign, while a move below can be bearish.
However, you can’t just automatically buy or sell based on moves above or below the 50 day.
Always seek confirmation from other indicators or methods before taking action.
Golden and Death Cross
The 50-Day SMA plays a crucial role in spotting 'Golden Crosses' and 'Death Crosses.'
A Golden Cross occurs when the 50-Day SMA crosses above the 200-Day SMA, which typically signals a bullish trend.
As you can see, Microsoft (MSFT) rallied hard after its 50-Day crossed over the 200-Day.
A Death Cross is a bearish signal when the 50-Day SMA crosses below the 200-Day SMA.
Risk Management
In certain situations, setting stop-loss and take-profit levels around the 50-Day SMA can be a wise risk management strategy.
For examples, some traders in long positions may set stops around the 50-Day SMA.
Combining with Other Indicators
For a more comprehensive trading approach, consider using the 50-Day SMA alongside other indicators like the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), or Bollinger Bands.
Conclusion
The 50-Day Moving Average is an indispensable tool for traders looking for a balanced view of market trends. It gives you medium-term trend analysis, possible support or resistance points, and ease of use.
So it belongs in your trader toolbox.
Just remember that no indicator should be used in isolation. The should be part of a well-rounded and diversified trading strategy.
To Learn More About Moving Averages
If you’d like to get a better understanding of how moving averages can be used to find winning trade ideas, check out Scott Redler’s free eBook “The Ultimate Guide to Moving Averages.”