The 50-day simple moving average is a term that people come across quite often in the stock market. Many of you might have queries like- What is a 50-day simple moving average or How does it help in trading strategies? All these queries will be answered in this blog along with some other information, including how to calculate 50-day SMA, its key uses, and when not to use it.
What Is the 50-Day Simple Moving Average?
The 50-day simple moving average (SMA) is a metric used by traders and analysts for indications of a stock’s historical price trends. In the simplest terms, it is a trendline representing the closing prices of a stock averaged over the previous 50 trading days.
The “moving” denotes that the average value for each day changes with the daily closing prices of the stock. The trendline is called “simple” since the weight given to each day’s closing prices is the same. In contrast, an exponential moving average (EMA) allocates greater weights to the more recent closing prices.
The 50-day SMA is commonly used because historical technical analysis of price movements has shown it to be an effective indicator of the strength or weakness of a stock’s current price action. For example, if a stock price has moved significantly below the 50-day moving average, it is considered a downtrend.
On the other hand, if the current price movement is above the 50-day moving average, it can be interpreted as an uptrend. This interpretation assists investors to make the right decision of selling or buying the stock.
Calculating the 50-Day SMA
One reason for the popularity of the 50-day SMA is its ease of calculation. It is a simple arithmetic mean of the closing prices from the last 50 days (or ten weeks).
To calculate it, note the closing prices of a stock for each of the previous 50 days, add them, and divide the sum by 50. Thus, if n1 is the closing price on the previous day, n2 is the closing price two days back, and so on, the formula comes out to be:
50-day average = (n1 + n2 + n3 + … + n49 + n50)/50
On calculating this value, you will get different points that can be plotted on a trendline in a chart. To find 100- and 200-day SMAs, the only difference is that the closing prices are for 100 or 200 days, which are then divided by 100 or 200, respectively.
Advantages of the 50-Day SMA
The 50-day SMA is commonly used, along with some longer-term moving averages, for helpful market signals and to identify false market reversals. Let’s say, you see a slight downward movement in a stock’s price during intra-day trading.
However, if this lower price has not gone beyond the 50-day SMA, it is very likely a temporary retracement, and the price is likely to recover in some time and continue its overarching trend.
Let’s look at some other ways the 50-day SMA can be helpful.
As the Support Level
An asset’s support level is the level below which its price rarely falls for a period. Whenever the asset’s price reaches this level, buyers enter the market, and the price goes up again. The point where the price just pulls back from the support level is called the demand zone.
The 50-day SMA acts as a realistic support level for a stock, as it indicates the average price that all investors have paid over the past 50 days to obtain the stock. Therefore, if the stock’s price breaches the support level, it strongly indicates a cheap buy.
As the Resistance Level
The resistance level is the point above which an asset’s price rarely rises. It gives a strong indication of leaving the market while keeping in mind other indicators as well. The 50-day SMA coincides with the upper limit of the supply zone; if there’s enough buying action in the market, a stock’s price can breach the resistance level.
As an Indicator of a Stock’s Health
This point, in a way, flows from all we have covered until now about the 50-day simple moving average. For a stock with solid fundamentals, the price generally remains above the 50-day SMA. However, if the price, especially the closing price, is below the 50-day SMA, the standard interpretation is that of a downward trend.
Disadvantages of the 50-Day SMA
The 50-day SMA can signal changes in a stock’s strength or weakness quicker than longer-term moving averages, which is why traders use it for trading. However, relying solely on this indicator isn’t a great idea except for gauging market strength. This is true in general, but the 50-day SMA can misinform in certain situations.
Another notable issue is its use of historical data which affects its analysis efficiency when the stock price changes quickly. This can happen if it’s a volatile stock.
The 50-day SMA doesn’t perform well in choppy markets. To counter the uncertainty of such markets, analysts adjust the timeframe of the moving averages.
Sometimes, people with overreliance on the 50-day SMA can be taken for a ride by more experienced traders. To cite an example, a stock goes beyond the moving average at some points during intra-day trading.
The former group will overreact and execute trades. However, this may just be a minor deviation prompted by other traders, and the stock soon returns to its original trend. Those who stick to their guns during this minor deviation would make profits, while those who react too quickly lose money.
The 50-day simple moving average trading strategy works well as a trend indicator, especially for long-term trend traders. For better decision-making, pair it with the 200-day SMA. While these indicators are popular because they are effective, remember not to blind yourself to overall market conditions.