- August 21, 2019
- Posted by: CoachShane
- Categories: Trading Article, Trading Indicators
The 50-day moving average is one of the more popular technical indicators used in technical analysis. Some would say it is one the best tools for day trading due to the amount of traders that consider it when making decisions.
Like all simple moving averages, there is nothing magical about the 50 day SMA and here is how to calculate it:
Add all the closing prices of the last 50 days
Divide the sum by 50 to get the present-day average
While it is good to know how an indicator gets its information from the various data points, your charting package will do all the calculations for you.
Why should you use a 50 period moving average?
The 50 is a slightly longer-term moving average that tracks the last 10 trading weeks. Traders will often use the 50-day on the daily charts and the 10-week moving average on the weekly charts. The 50 day gives us a bigger picture trend view and helps remove the noise from the bars on the charts.
With a quick glance, you can get a quick overview of how the market has performed, the long term trend direction and if the price is range-bound.
Some will say that “all the big players use it” but that is a statement that is very hard to prove.
With the right trading approach, the 50 period moving average can also be a buy and sell signal indicator and you would need a trigger to get you into a trade (more on that later).
Is There A Difference Between 50 SMA and 50 EMA?
Comparing simple moving averages vs exponential moving averages is much like heading down a rabbit hole.
There are many different weightings that can be used but does complex always equal results? Consider that we are still looking at a mathematical calculation and not a strong prediction, is there any value to using a 50 EMA over a 50 SMA?
Remember, to calculate the simple moving average: Get the price sum of the last 50 closes and divide by 50. The SMA considers all closing prices important.
The 50 period exponential moving average gives more weight to the recent price and less to price further in the past. Some will argue that a price spike of 45 days ago is not as important as a spike two days ago and while that may be accurate, does it really make a difference?
You can see by this chart that there are small differences in the plotting of the 50 moving average. The question is will it affect your trading edge? Is it something to be concerned about?
Only you can answer that but “keep it simple” is usually my go to approach.
What Is The Significance of the 50 Day Moving Average
The 50 SMA is an often referred to moving average especially in the stock world where it is used as a trend indicator and offers buy/sell signals as well when combined with price action.
Given that it is often mentioned, many traders do find value in it for their own analysis based on the premise that if many are watching it, something must happen in relation to it.
The significance is really what you decide it to be.
How to determine trend direction:
If the last 50 periods closing prices are getting larger on average, the 50 moving average will show an uptrend
If the last 50 periods had lower prices on average, the moving average will show a downtrend
This is a daily chart of the stock Apple (APPL)
The shaded area highlights where the stock price had breached the 50 day moving average, ranged, and then gaped to the downside.
The trend direction shown by the slope of the average and price below the average, indicates a down trend in the Apple stock.
This is a daily S&P 500 Futures chart
The yellow shaded area shows a current downtrend that started with a momentum thrust to breach the 50 SMA which is an added confirmation we could be looking at lower prices.
While the price has breached to the upside of the average, we need to see the sustained upside and a turn of the 50 moving average to consider the downtrend is over.
Daily Chart of Silver
When the price is whipping around the 50 day moving average, traders may want to consider a range-trading environment.
You want to see sustained price movement in one direction before deciding to put risk on in the market. You could decide to use a range trading strategy to take advantage of a market in this state.
Regardless of how you trade, you can see that a quick glance at the moving average can help you determine if it is a market you will be bearish, bullish, or stand aside.
Using Price Action + 50 Moving Average For Trend Confirmation
The far left with the green star on the S&P chart is a good indication of how price action should be used with any moving average.
Momentum put price on the backside of the average and we even see around April, the slope of the average turned downwards.
But price action for a downtrend needs lower highs and lower lows. While we were seeing lower highs, lower lows were not being registered. Price eventually broke to the upside from the triangle chart pattern which is, on average, a continuation pattern.
Quick Recap Of Trend
- Bullish definition – If the slope of the moving average is up, the market is bullish and only consider buying opportunities
- Bearish definition – If the slope is down, think to short as the market is bearish
- If price breaches the moving average to the upside and price action shows trending action of higher highs/lows, think longs
- If price breaches the 50 to the downside and we get price action of lower lows and lower highs, think shorts
- If price is holding around the average, stand aside until price breaks in a direction
Using the 50 period simple moving average will help you determine the direction of the medium term trend direction. It can also show you at a glance if the instrument you are trading is in a range.
While these examples are using a 50 day moving average, you can use it on virtually any time frame. I also want to add that some traders will add the 10 EMA for a momentum read and the 200 EMA for longer term trend direction. Using three moving averages is a common approach in trading.
50 Day Moving Average Strategy – Trends and Pullbacks
We want to keep a trading strategy as simple as it needs to be while keeping in mind the strength of the tools we are using.
Let’s combine the trend direction signal of the 50 day as well as the average price of the last 50 and wait for a return to the mean (average) for a trade.
- For trend direction, let’s see price breach the 50 period moving average and price move away from the average showing interest in the new direction
- Price pulls back into the zone of the moving average
- To trade the pullback, the price can not have momentum
- If price stalls in a range before pulling back, we want to see a measured move
- Entry trigger is trend line break or use the 3-bar reversal pattern
- The trend is up and price puts in a pullback that is actually a measured move. Price does not breach the trend line – no trade
- New trend direction and pullback to the 50 SMA. Price closes under trend line which is our trade trigger
- Momentum into the pullback is not what we want to see. Price does range but does not complete a measured move
- Bullish trend direction. Pullback and break of the trend line.
- Momentum into a pullback. No trade.
- Momentum resolves into range. The measured move completes but price breaches upside of 50 with no entry.
Stop losses above or below the 50 moving average. I prefer using a multiple of the average true range for stop loss placement.
Price targets can be swing highs or lows, trailing stops, or multiples of risk.
This is a great way to approach the markets in a swing trading fashion. It can also be used on lower time frames.
50 and 200 Day Moving Average Crossover Strategy
Some traders like to combine two moving averages and use the crossover of the moving averages as:
- Trend direction
- Trade triggers
- Pullback depth
One of the popular combinations is the 50 and 200-day moving average crossover. That is called a golden cross for longs and death cross for shorts.
- The golden cross is a bullish signal and traders start to look for long trades
- The death cross is considered bearish and many traders use it to unload positions and short certain markets
Trading a golden cross means when the 50 day moving average crosses the 200-day moving average to the upside, you are bullish and buy.
Let’s use the same moving average periods by using the cross for a trend change, the 200 DMA to monitor the long term trends, and the 50 DMA for setups and signs of strength or weakness.
Nasdaq 50 SMA and 200 SMA Crossover
The trend is up as shown by the 200 moving average and the 50 period moving average has crossed to the upside earlier.
One thing to note is the circles with the line through them indicate areas where price has pulled far away from the 50 period MA. When this occurs, we can determine that price has turned overbought (in the case of an uptrend) and a strong snap back in price may happen.
Be on alert when taking any trades when price pulls this far from the 50.
- We are bullish and price pulls back into the average and we use a break of the trend line as an entry
- This is actually a 1:1 measured move even though we do see momentum in the pullback. It also comes into an area of previous price rejection.
- Pullback trade
- After an overbought condition, the price has breached the 50 SMA but the 200 SMA has held. Price is in a previous swing level and can be traded
- The strong pullback that resolves into a small range after pulling back in the zone of the previous area of support
- Triangles are usually a continuation pattern for another long trade
- Trading the range breakout
- Price pulls back with momentum and then ranges. Our pullback failed into a range where we use range trading strategies
- The trend has changed and the price is pulling away from the 200. We can ignore the pullbacks for shorts until we see the lines cross or measure the strength by the slope of the 50 which in this case, is severely bearish.
Stop losses when using the 50 and 200 SMA crossover can be the average true range or a price pattern stop loss.
Notice that we rely heavily on common trading patterns while using the 50 and 200 moving average for trends, pullback distance, and strength.
Important Takeaways About The 50 Period Moving Average
The significance of the 50-day moving average is that it is often referred to in the media which means many traders could be watching it.
It can show the medium-term trend direction and be used to measure the length of pullbacks so you are actually buying weakness in a bullish market, and selling strength in an overall bearish market.
When the 50-day MA crosses the 200 day MA, we are looking at a trend change and depending on which way the crossover occurs, we could be bullish or bearish.
The calculation involves finding the average closing price of the previous 50 days. There is nothing magical about it.
A 50-day moving average strategy can be as simple as trading in the direction of the slope of the MA using basic price patterns such as pullbacks.
There is no best moving average although shorter length averages will be more sensitive to price shocks. Short term traders usually use a 10, 20-period moving average while longer-term players use the 50, 100, and the 200 day.
While the 50-day moving average may appear to offer support or resistance to price, it is an illusion. It is an artifact of the calculation of the average and price often turns when in the zone of previous price pivots.