A 50-day moving average (MA) is one of the most sought-after technical indicators of trends in price movement. It is commonly used by traders to place support and resistance level for stocks. It is popular because it is a realistic and effective trend indicator.
Here’s a typical 50-day moving average chart for the BSE Sensex
This type of average is a simple one used to examine price movement without the noises of daily price changes, as shown by the purple line in the above chart. It is the average of the closing prices of stocks in the last 50 trading days or ten weeks. When plotted across a stock price chart, you can see that it becomes a smoother line reflecting the direction of the price movement. If it shows an upward trend, you can expect prices to have risen incrementally, and if it shows a downward trend, then prices have declined.
Calculating The 50-day Moving Average
You can calculate moving average over 50-days by merely adding up the closing prices from the last ten weeks (day 1+day 2+day 3…day n) and divide the sum by the total number of days, n, that is 50. This is why simple moving averages are popular. To get a longer-term view on how the prices have moved, all you need to do is add more number of days or periods and the closing prices. To calculate a 200-day moving average, you simply need the closing prices for the 200 days, add them and divide them by 200.
Importance
This average is a simple, effective and robust indicator of price trends. It is popular and challenging to violate on smaller price movements. Combined with a long term moving average, it gives more substantial market indications.
Popular Support and Resistance Level
Traders also look at this type of average as a useful and effective benchmark for support and resistance. While it offers a historical view of price action, it also reflects the prices investors have bought and sold the assets for in the last ten weeks. It shows the range and trend of price movement.
Secondly, the points of support and resistance that lie along the 50-day line are often respected by daily trades. These points are not easily breached, and prices usually either bounce off the support levels or pull back from the resistance levels aligned on the MA line. So it offers a great entry and exit point for traders, with less loss of opportunity.
50-day Moving Average As Support
Investors use this moving average as the support level, where they buy stocks when prices hover in the demand zone. A demand zone is where the prices just pull back from below the support level. As more buyers enter at this point, the prices rise and rise again above the 50-day MA. This moving average over 50 days offers a realistic support level.
50-day Moving Average as Resistance
Traders place stop orders to short securities when prices begin to collapse on entering the supply zone or by enough buying force, breach the moving average over 50 days. The upper ceiling of the supply zone coincides with this average. It takes sufficient purchasing force to breach the levels of resistance, which makes it a reliable level of resistance to place exit trades since 50-day MAs usually coincide with the top of the range at which stocks are trading.
Indicator of the Health of a Stock
This average is also an indicator of the health of a stock. For example, when the stock price makes a cup formation, trailing above the MA and not breaching below, it indicates the stock has strong fundamentals and has kept the buying force intact. When the bullish upward movement is sustained, the prices will trail above the 50-day MA. When prices move well below the average, it signals a trend reversal into a bearish sentiment.
Low Risk
A simple moving average like this one, is considered reliable for placing entry and exits points because it uses the price principle. A good moving average reflects a level that prices do not frequently breach. Prices along the 50-day MA are not easy to break out of because of the range and duration. So it is unlikely that small discrepancies will cause a breach of resistance or support levels, avoiding giving off false market signals.
Trading Strategy
A 50-day moving average strategy is straightforward. If prices graze the average as support and then bounce back, you can buy a stock or go long. If prices are peaking at this average as resistance and pull back, then you can consider selling or shorting the stock, before a further decline. This is because it may take a lot of buying interest to push the prices back above the moving average of 50 days.
You can enter a trade when prices come out of the 50-day MA, in the direction of the breakout. For example, if there is an uptrend, you can buy at breakout levels and short it when prices peak. Usually, it takes time for the price trend to reverse from the direction it broke out in. You can always set a stop loss in the opposite direction to mitigate potential losses. This stop loss is useful if the prices retract for some unforeseen event, the release of government data or company financial information releases.
How long should you hold this trade? A simple rule traders suggest is, to hold the deal until prices break the moving average of 50 days in the opposite direction than the direction of your trade. For example, if you went long, hold it until prices break the other way and cross average in an upward swing.
Moving Average Crossover Strategies
To have more strength in the indicators, traders use this 50-day moving average together with a 200-day moving average to test if a particular stock is bullish or not. When a stock’s short-term moving average crosses over the long term moving average, like a 200-day one, it is called a Golden Cross in stocks. It is a strong signal for a bullish turn in sentiment. It means the shorter-term MA is rising faster than the longer-term moving average. It reflects the stocks are breaching the support levels of long term MAs to make new highs.
