Best 50-Day Moving Average Strategy

There are different periods of moving average used by traders, such as the 20-period, 50-period, 100-period, and 200-period moving averages.

While there is no best period for moving averages — it all depends on the market condition and your style of trading — the 50-day moving average seems to work very well in most markets when there is a good trend.

The 50-day moving average indicator is one of the most widely used technical analysis tools in trading the financial markets.

While this particular moving average is not a holy grail — and none is — it helps you get a quick overview of the market in a glance, spot the right move, and identify the right place to look for trading opportunities.

In this post, you will learn the following:

• What the 50-day moving average is
• Its significance
• Its various uses in trading
• The best strategies to trade with the 50-day moving average

What is the 50-day moving average?

The 50-day moving average is a moving average indicator that uses a 50-day period in the calculation.

A moving average is a technical indicator that averages specific historical price data over a chosen period.

As the price keeps printing new bars, the average is continuously changing, and the line connecting the averages gives the moving average line.

For example, let’s say that the closing price of an asset X over the last 4 days is 48, 49, 51, and 52.

The average of the last 4 days would be [48 + 49 + 51 + 52] / 4 = 50. If, by tomorrow, the price closes at 54, the 4-day average for tomorrow will be [49 + 51 + 52 + 54] / 4 = 51.5.

Say the day after the price closed at 55, the 4-day average for that day will be 53. Now, a line joining these 4-day average values — 50, 51.5, and 53 — constitutes the 4-day moving average line.

Extending this concept using a 50-day averaging period gives you the 50-day moving average — just adding the price data of the most current 50 days and dividing by 50 and repeating continuously as new price data is generated each day.

However, that example above shows how to calculate one type of moving average — the simple moving average. There are other types: exponential, linear-weighted, and smoothed moving averages.

Both the exponential and linear-weighted moving averages assign more weight to the most recent price points, but while the exponential moving average (EMA) uses an exponentially weighted multiplier, the linear-weighted moving average (LWMA) uses a linearly decreasing weight in its calculation.

The smoothed moving average (SMMA) uses all the historical price data to get a smoother indicator.

Well, all those are for knowledge sake; you won’t be calculating the 50-day moving average manually since the trading platform does that automatically.

All you need to do is attach the moving average of your choice to your D1 chart and set the period to 50.

The 50-day moving average tracks the market performance in the last 50 trading days or 10 trading weeks.

Thus, using a 10-week moving average on a W1 chart is similar to using a 50-day moving average on the D1 chart. It helps filter the noise so you can see the price direction more clearly.

Some traders tend to prefer the 50-day EMA over the SMA because the EMA is more sensitive to price movements and reacts faster to change in price direction. However, the SMA and even the LWMA and SMMA work very well.

The significance of the 50-day moving average

As a technical analysis tool, the 50-day moving average can tell a lot of things about the market, which may help you in making key trading decisions. At the basic level, the moving average can show you two things :

• Where the price is likely headed
• Areas of support and resistance levels, depending on its position in relation to the price

The direction of the medium-term trend

The 50-day moving average is very useful in identifying the direction of the short-term to medium-term price trends.

Being an average value, the tool often lags price, but it can still show where the price is headed.

One of the ways to identify the direction of a trend using the 50-day moving average is by observing the slope of the indicator.

An upward-pointing indicator signifies a medium-term uptrend; a downward-pointing indicator implies a downtrend, while a horizontally sloped indicator shows that the market is ranging at the moment.

In addition to the slope of the indicator, you should also take note of the position of the indicator in relation to the price action.

When the price is trending upward, the 50-day moving average mostly stays below the price, and if the price pulls back below the indicator, it quickly crosses back above it.

For a downward-trending market, the indicator tends to stay above the price most of the time.

In a ranging market, the price crisscrosses the indicator line, with the swing points lying both above and below the indicator line.

Dynamic support and resistance levels

Aside from showing the direction of the trend, the 50-day moving average can show important price levels that can act as potential swing points, where can reverse to start a new impulse wave in the trend direction.

When the market is trending upward, the 50-day moving average line stays below the price, so it acts as a dynamic support level. There is a good chance that the price will bounce off when it drops to the indicator line.

In a healthy downtrend, the price tends to stay mostly below the 50-day moving average line and occasionally rallies to the indicator line, where it tends to reverse to continue a downward move. Thus, the indicator often works as a dynamic resistance level in such situations.

How to use the 50-day moving average in trading

Now that you have known what the 50-day moving average is, let’s take a look at the different ways traders make use of it in their trading. Basically, there are three ways traders use the 50-day moving average :

• Spotting areas of value to look for trading opportunities
• Identifying change in trend direction
• Trailing profit

Finding areas of value in the market

Usually, traders look for trading opportunities at important price levels, such as established support or resistance levels.

But the price does not always pull back to a support or resistance level in a trending market.

So, looking for trades only at support and resistance levels would lead to missing a lot of trading opportunities, especially in a strongly trending market.

Most often than not, a strongly trending market doesn’t experience deep corrections, so the pullbacks tend to end around the 50-day moving average line.

It, therefore, makes sense that in such market conditions, you look for trading opportunities around the 50-day moving average line.

As we stated earlier, in an up-trending market, the indicator line acts as a dynamic support level, so you can look for buying opportunities when the price gets around it because there is a good chance that the price will bounce off it.

Moreover, the 50-day moving average is a popular technical trading tool, which other traders are also watching to look for trading opportunities.

Since the indicator line acts as a dynamic resistance level when the market is trending downward, you can look for shorting opportunities when the price rallies towards it.

Many traders are also watching to see how the price reacts at that level so that they can go short.

Identifying trend reversals

Traders also use the 50-day moving average indicator to gauge when the medium-term trend is changing direction so that they can look for trades in the new direction. This helps them to catch the new trend early enough.

There are two common ways to use the 50-day moving average in identifying a potential trend reversal :

• Using the price crossover
• Using the moving average crossover
• Price crossover

A price crossover happens when the price crosses above or below a moving average line, in this case, the 50-day moving average line.

When the price crosses from below to above the moving average line and continues climbing, it is known as an upward cross, and when it crosses from above to below the indicator line, it is called a downward cross.

Hence, the 50-day moving average acts as a sort of gauge for the trend — when the price changes from a downward course and climbs above the indicator, the trend might be turning to the upside. In this case, the trader looks to go long if other factors align in that direction.

On the other hand, when a previously ascending price turns downwards and closes below the 50-day moving average line, the trend may be changing direction to the downside.

This presents an opportunity to look for short positions if other factors are in support of the trade.

Moving average crossover

Another way, probably a better way to identify a potential change in the trend direction, is using the 50-day moving average with another moving average to look for a moving average crossover — a situation where a shorter-period moving average crosses the longer-term moving average, signifying a change in the trend direction.

When using this method to check for the trend reversals, the period of the second moving average you combine with the 50-day moving average will depend on your trading style.

If you are a short-term trader — which means you are more interested in short-term moves — you may want to use a 10-day or 20-day moving average. For a position trader, it’s common to combine with a 200-day moving average.

Whatever the case, when the shorter-period moving average crosses above the longer one (a 10-day crossing above the 50-day or the 50-day crossing above the 200-day), it is called a golden cross and may indicate an upward trend reversal.

On the other hand, when the 10-day moving average crosses below the 50-day or the 50-day crosses below the 200-day, it is known as a death cross, and it might indicate a downward trend reversal.

Trailing profit

One other important way traders make use of the 50-day moving average is by using it to trail their profit so that they can ride the trend to its conclusion.

A trailing stop is a order that follows the price as long as it is moving in the trend direction.

The 50-day moving average indicator itself is not the trailing stop, but it serves as a guide to where the stop loss should be at every point in time.

In an uptrend, the stop loss stays some distance below the moving average line, while in a downtrend, it stays above the line. Your trade is closed when the price crosses the moving average and hits your stop loss order.

When using the 50-day moving average line to trail your profit, you can manually move your stop loss order at a safe distance away from the indicator line at the end of every trading day, or you get a script that combines a stop loss order with a moving average line and input the appropriate settings — a 50-day period for the moving average and the distance of the stop loss from the moving average line.

In this chart below, you can see that it was possible to ride the trend from August 2014 to February 2015 by trailing the profit a little distance above the moving average.

50-day moving average strategies

At this point, you have learned the various ways traders make use of the 50-day moving average in your trading.

But how do you formulate a simple, rule-based trading strategy with this technical trading tool? Here, we take a look at three simple strategies you can trade with the 50-day moving average.

As we said earlier, the 50-day moving average can help you identify the direction of a medium-term trend, as well as important areas of value in the market.

Those two factors — the trend direction and value areas — are key to this particular trading strategy because your aim is to trade in the direction of the trend when the price pulls back to a good area of value as indicated by the 50-day moving average line.

But a trending market pulling back to the 50-day MA line is not enough to place a trade.

You need a trade trigger that tells you when the pullback is likely to reverse and start a new swing in the trend direction.

There are three tools you can use as trade triggers: reversal candlestick patterns, countertrend line, and oscillator signals.

Some of the reversal candlestick patterns you can use as a trade trigger are the pin bars, engulfing bars, and inside bars.

Alternatively, you can use a countertrend line, whereby a breakout beyond the line is an indication to enter a trade immediately.

The last option is the oscillator signal, which can either be the overbought/oversold signal or a divergence between the price and the oscillator.

To trade this strategy in an up-trending market, here are the steps to follow:

-Use the 50-day moving average line to confirm an uptrend

-Wait for the price to pull back to the indicator line

-Look for bullish reversal candlestick patterns, such as a bullish pin bar, an engulfing bar, or an inside bar.

-Place your stop loss a few pips below the swing low

-Put your profit target at the next resistance level or a 100% Fibonacci level

In this chart below, the market was in an uptrend. Notice the inside bar pattern encircled and the position of the stop loss. Can you see the two bullish pin bars at the left side? Those were also potential entry levels.

Here are the steps to follow when trading a pullback reversal from a 50-day moving average in a down-trending market :

-Confirm that the market is in a downtrend using the 50-day moving average

-Wait for the price to rally to the indicator line

-Look for bearish reversal candlestick patterns, such as a bearish pin bar, an engulfing bar, or an inside bar.

Alternatively, you can make use of an oscillator overbought signal or bearish divergence, or you wait for a breakout below the countertrend line attached across the lows of the pullback candlestick

-Put your stop loss order a few pips above the swing high

-Place your profit target at the next support level or a 100% Fibonacci level

The GBPUSD chart below shows a downtrend. Notice how the price tends to reverse around the moving average level.

Notice the bearish engulfing pattern and the bearish pin bar. A stop loss above the swing high is fine.

Trading the moving average crossover strategy

The moving average crossover strategy is a popular strategy used by stock traders, especially position traders, and the 50-day moving average is a major component of that strategy.

With this strategy, the role of the 50-day moving average varies according to the style of trading:

For short-term trading, it can be your trend identifier, while a shorter-period MA, like the 20-period or 10-period MA will serve as the trigger. In that situation, this is what you do:

-When a 10-day or 20-day moving average crosses above the 50-day moving average, look for a long position if the higher timeframe is an uptrend, and place your stop loss below the swing low — a 2:1 profit target is fine

-When a 10-day or 20-day moving average crosses below the 50-day moving average, look to go short if the higher timeframe is in a downtrend, and place your stop loss above the swing high — aim for a 2:1 profit target

From the charts below, you can see that the W1 chart was in an uptrend. When the 20-day MA crossed above the 50-day MA, as you could see in the D1 chart, it was an indication to go long.

If your trading style is position trading, you can combine the 50-day moving average with the 200-day moving average, in which case the 200-day indicator identifies the trend, while the 50-day indicator serves as a trigger. Here how to approach use them:

-When the 50-day MA crosses above the 200-day moving average, then, look to go long if the price is not too far away from the 50-day MA — place your stop loss below the 200-day MA and use a 2:1 profit target.

In the chart below, the 50-day moving average crossed below the 200-day moving average, but the price had extended as at then. So, it was better to wait for a pullback. Note the position of the stop loss and the profit target.

Trading price crossover the right way

The price crossing over the 50-day moving average can be a profitable strategy if you know how to trade it.

There are two ways to approach price crossovers. One way is to trade it in the direction of the trend, and the other is to trade it as a possible trend reversal.

As a new trader, it is advisable to go with the trend. What happens, in this case, is that the price pulls back beyond the 50-day MA and later crosses back to continue in the direction of the trend. To trade this strategy, here is what to do:

-After a pullback beyond the 50-day MA, confirm that the 50-day MA is still sloping in the trend direction

-Wait for the price to cross back to the direction of the trend

-Enter a trade in the direction of the trend if the price is close to the moving average — if not, wait for a pullback

-Place your stop loss below the swing low

-Aim to take profit at 2:1 reward/risk ratio or ride the trend with a trailing stop

In the EURUSD chart below, you can see that the market was in an uptrend and the price pulled back below the 50-day MA. When the price climbed above the indicator, it was a signal to go long.

Notice the position of the stop loss and the profit target, as well as where the trade would have been stopped out with a trailing stop loss.

If you want to trade a potential trend reversal, be sure there are other factors that support such a move.

For example, if you think the price is reversing to the downside, be sure the price is bouncing off a higher timeframe resistance level. This increases the probability of the trade working out.

In this case, you can go short when the price closes below the 50-day moving average after hitting the higher timeframe resistance level. Place your stop loss above the resistance level and trail your profit.

The charts below are those of EURUSD. In the W1 chart, you can see a well-established resistance level.

Stepping down to the D1 timeframe and attaching a 50-day moving average, you can see how the price crossed below the indicator and continued dropping. Note the position of the stop loss.

Final words

The 50-day moving average is a popular technical analysis tool used by stock, futures, and forex traders to analyze and trade the financial markets.

You can use it to identify medium-term trends, spot areas of value, formulate trading signals, and trail your profit.