Overlay Indicators (19 lessons)
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6 Tips for How to Use the 50-Day Moving Average

The moving average indicator is one of the most important and commonly used tools in stock trading.

Today we will go through 6 tips for how to use a 50-day moving average.

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Why Use a Moving Average?

The moving average is a trading indicator used to smooth the price action on the chart.

The moving average indicator takes into account a number of periods when calculating its value.

These periods could be adjusted, which also modifies the appearance of the line on the chart. The more periods it takes into consideration, the smoother the line.

Let’s say we wanted to calculate the 5-period moving average for the following values:

3.00
4.00
8.00
10.00
12.00

The 5-period simple moving average would equal:

(3+4+8+10+12)/5 = 7.4

Each time a new period appears on the chart, the formula is recalculated.


The moving average is a lagging indicator. The reason for this is that the moving average needs a given number of data points based on the periods in order to print a value.

5-Day SMA

5-Day SMA

The purple curved line on the chart is a 5-period simple moving average. This line is not smooth at all. This is because 5 periods is such a small time frame and thus will result in a number of trade signals.

More signals then I care to track.

Now that we have provided a visual of a moving average, let’s dig into the 50-day in order to see the difference on a longer time frame.

What is a 50 Day Moving Average?

The 50 day moving average is one of the most commonly used SMAs in stock trading.

This makes trade signals around this line pretty reliable based on the number of eyes monitoring the trading activity at this level.

Below you will see a real 50-day moving average on the chart.

50 Day Moving Average

50 Day Moving Average

As you can see, the 50-day SMA is much smoother than the 5-period moving average.  This will naturally result in less trading signals and an increase significance on breaches of the average.

6 Tips for How to Use the 50-Day Moving Average

Now that we have discussed the structure of the 50-day moving average, I will now introduce you to six essential tips for how to use the indicator.

  • Stock price above 50-day moving average is considered bullish.
  • Stock price below 50-day moving average is considered bearish.
  • If the price meets the 50 day SMA as a support and bounces upwards, you should think long.
  • If the price meets the 50 day SMA as a resistance and bounces downwards, you should think short.
  • If the price breaks the 50 day SMA downwards, you should switch your opinion to bearish.
  • If the price breaks the 50 day SMA upward, you should switch your opinion to bullish.

These six rules are crucial for understanding the characteristic of the 50-day simple moving average indicator.

50 Day Moving Average Trading Strategy

In this trading strategy, we will lay out the entry, exit and stop loss when trading.

Let’s dig into this a little further.

50 Day Moving Average Trade Entry

To enter a 50-day moving average trade, you should wait for a breakout. Whenever the price breaks the 50 day SMA, you should open a trade in the direction of the breakout. In most cases, the price action will continue in the direction of the breakout.

50 Day Moving Average Stop Loss

Every 50 day moving average trade should be protected with a stop loss order. Nothing is sure in stock trading. The 50 day moving average strategy is no different. In the long term, we expect the price action to continue in the direction of the breakout. However, there will be cases when the price action will surprise us.

The price action could sometimes rapidly shoot in the opposite direction with a big candle. This could happen due to the release of some unexpected report.

The ideal place for our stop loss is beyond a price edge created prior to the signal we use to enter the trade.

If the price breaks the 50 SMA upwards, we need to go long, placing a stop below a bottom prior to the breakout. The opposite is true for bearish trades.


If the price breaks the 50 SMA downwards, we need to short the stock placing a stop below the bottom prior to the breakout.

50 Day Moving Average Take Profit

The rule to close 50 day moving average trades is very simple. Hold your trades until the price action breaks your 50 day moving average in the direction opposite to your trade.

If you are long, you close the trade when the price breaks the 50 day SMA downwards. If you are short, you close the trade when the price breaks the 50 day SMA upwards.

Trading Example with the 50 Day Moving Average

Now let’s approach a real 50 day moving average trading example:

50 Day Moving Average Trading Example

50 Day Moving Average Trading Example

Above you see the 50 day moving average chart of Bank of America. The image covers the period between December 2015 and June 2016. The blue curved line on the graph is the 50-day SMA.

The action on the chart comes in the moment when the price breaks the 50-period SMA downwards. The breakout is shown in the red circle on the image. See that the price first attempts a couple of times to break the SMA downwards.

However, we need to wait until the price action breaks the level in order to get a valid bearish signal. Therefore, we short the stock when we see a sharp decrease through the last two price bottoms below the 50 day SMA.

We place a stop loss order above the last big top on the chart. The right location of your stop loss order is shown with the red horizontal line on the chart.

See that the price creates a very sharp decrease afterwards and enters a bearish trend. We need to stay in the trade as long as the price is located below the 50-period SMA.

The blue channel on the chart displays when the price breaks the 50 day SMA and we close the trade.

However, this is also a long signal and we tackle the market with a new trade, which is bullish. We place a stop loss order below the last bigger bottom on the chart as shown on the image.

The price then returns and tests the SMA as a support. A bullish bounce appears afterwards, which resumes our bullish hopes. The price experiences a few bumps along the way, but the 50 SMA sustains the price action.

The price then creates a top, which is lower than the previous on the chart (pink line). Then we see a breakout through the 50 day moving average. Therefore, we close the trade on the assumption that the price action will reverse and this is exactly what happens.

This case is an example of two 50 day moving average trades, which differ in terms of their profitability.

The first trade is short and it brings a solid profit of 15.60% for three-and-a-half months. However, the second trade brings only 0.22% for about three months.

Your trading results will vary.  This is a cost of doing business and is simply unavoidable in the market.

The key is knowing that your system will win in the long run and sticking to your convictions.

50 Day Moving Average vs. 200 Day Moving Average

Another important moving average is the 200 day moving average. I specially mention this tool, because it creates a very strong signal when used in conjunction with the 50 day moving average.

This signal is called the golden cross.

The golden cross is a signal created by the 50-day moving average crossing through 200 day moving average to the upside.

A good Golden Cross trading strategy is to open trades in the direction of the golden cross and to hold them until a break in the opposite direction.

Golden Cross - Trading Example

Golden Cross - Trading Example

Above is the daily chart of Google from June 2015 to July 2016. The blue line on the chart is a 50-day moving average. The red line on the chart is the 200-day moving average.

In the green circles we have highlighted golden crosses.

The first golden cross is bullish and we use it to buy Google.

We place a stop loss order below the bottom prior to the cross. The trade needs to be held until the two moving averages create a bearish sell signal.

This long trade with Google generates a profit of 22.28% for one year.

Remember, the golden cross can be used very effectively when trading the stock market.

Conclusion

  • The moving average is an indicator which smoothes the price action on the chart by averaging previous periods.
  • The 50-day moving average is one of the most commonly used indicators in stock trading.
    1. It averages 50 periods of a stock.
    2. Many investors and traders look at the 50 day moving average.
    3. Therefore, the 50 day SMA is a psychological level, which acts as a support and resistance.
  • The 6 tips to use a 50-day moving average are:
    1. Stock price above 50-day moving average is considered bullish.
    2. Stock price below 50-day moving average is considered bearish.
    3. If the price meets the 50 day SMA as a support and bounces upwards, you should think long.
    4. If the price meets the 50 day SMA as a resistance and bounces downwards, you should think short.
    5. If the price breaks the 50 day SMA downwards, you should switch your attitude to bearish.
    6. If the price breaks the 50 day SMA upward, you should switch your attitude to bullish.
  • To trade with the 50 day SMA you should remember these rules:
    1. When the price breaks the 50-period SMA, you should trade in the direction of the breakout.
    2. You should place a stop loss order beyond a bigger top/bottom prior the breakout.
    3. You should stay in the trade until the price action breaks the 50 day moving average in the opposite direction.
  • The 50 day SMA combines well with the 200 day SMA:
    1. The crossover of the 50 day moving average vs 200 day moving average is called a golden cross.
    2. When you see a golden cross, you should look to get long.
    3. You should place a stop loss beyond a bigger top/bottom prior to the cross.
    4. You should hold the trade until the 50-period SMA is breached to the downside.



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