The 50-day moving average (also called "50 DMA" is a reliable technical indicator used by several investors to analyze price trends. It's simply a security's average closing price over the previous 50 days.
The primary reason behind the 50-day moving average is popular is because it's a realistic and effective trend indicator in the stock market.
The 50-day moving average is a dividing line that shows the stocks' technical health on the upper line and not technically healthy on the lower line. Furthermore, the percentage of stocks above their 50-day moving average helps gauge the market's overall health.
Several market traders also use moving averages to measure the profitable entry and exit points into specific securities.
A trader can calculate the 50-day moving average by moving average over 50 days by adding up the closing prices from the last ten weeks and divide the sum by the total number of days that is 50 [(Day 1 + Day 2 + Day 3 + ... + Day 49 + Day 50)/50].
To get a longer view of the price movement, a trader can add more days or periods and the closing prices.
To calculate a 200-day moving average, a trader will need the closing prices for the 200 days to add and divide them by 200.
The average is a simple and effective indicator that showcase the price trends. However, it is challenging to indicate smaller price movements, but it will deliver considerable market indications if it’s combined with a long-term moving average.
Let’s look at the importance of the 50-day moving average listed below:
Many traders look at this type of average as a reliable and helpful benchmark of resistance and support. While this average provides a historical view of price action, it also fluctuates in the prices investors have purchased and sold the assets for in the last ten weeks.
It shows the trend and range of price movement. Secondly, the points of resistance and support that lie along the 50-day line are often respected by the daily trades.
These points do not break easily, and prices bounce back from the support levels or pull back from the resistance levels aligned on the moving average line.
Due to this, it offers a great entry and exit point for traders, with few opportunities.
Many investors use this moving average as the support level where they purchase stocks when prices fluctuate in the demand zone. A demand zone means a zone where the prices pull back from the below support level as many buyers enter at this point, the price rise and again above the 50-day moving average. This moving average over 50 days provides a realistic support level.
When prices begin to fall on entering the supply zone or by enough buying force, several traders place stop orders to short securities and breach the moving average of 50 days.
The upper ceiling of the supply zone coincides with this average. Since 5-day moving average usually coincides with the top of the range at which stocks are trading.
It takes enough purchasing force to break the resistance levels, which makes it a reliable level of resistance to place exit trades.
A simple moving average like this one is an effective way for placing entry and exit points because it uses the price principle.
A good day moving average reflects a level that prices do not frequently break. However, because of the range and duration, the prices along the 50-day moving average do not break out easily.
So it’s unlikely that minor discrepancies will cause a breach of support or resistance levels, avoiding giving off false market signals.
The 50-day moving average is a straightforward strategy. If prices graze the average as support and then bounce back, a trader can buy a stock. If prices rise at this average as resistance and pull back, a trader must consider selling or shorting the stock before a further decline.
The primary reason is that it takes a lot of buying interest to push the prices back above the 50-days moving average.
A trader can enter a trade when prices come out of the 50-day moving average and in the direction of the breakout. For example: if there is an uptrend, a trader can buy at breakout levels and short it when prices rise.
Usually, it takes time to reverse the price trend from the direction it broke out in. A trader can set up stop loss in the opposite direction to reduce losses. The stop loss plays a vital role if the prices fluctuate due to unforeseen events like company financial information releases or the release of government data, and more.
To gain additional strength in the indicators, traders use this 50-day moving average along with a 200-day moving average to test the bullishness of a particular stock.
When a stock’s short-term moving average surpasses the long term moving average, like a 200-day one, it is called a Golden Cross in stocks. It indicates a strong single for a bullish turn.
It means the shorter-term moving average is growing faster than the longer-term moving average. It indicates that the stocks are breaking the long term MA’s support level to make new highs.
When a stock’s short-term moving average surpasses the long term moving average, like a 200-day one, it is called a Golden Cross in stocks
A demand zone means a zone where the prices pull back from the below support level as many buyers enter at this point, the price rise and again above the 50-day moving average.
A trader can calculate the 50-day moving average by moving average over 50 days by adding up the closing prices from the last ten weeks and divide the sum by the total number of days that is 50 [(Day 1 + Day 2 + Day 3 + ... + Day 49 + Day 50)/50].