The 50MA is one of the more popular moving averages, it’s also one of my favorites. In the post I will be sharing some tips on how to use the 50MA.
There are many different types of moving averages so let’s take a look at the three most commonly used:
- Simple moving average (SMA) – The most common type of moving average takes the sums of past closing prices over a set period of time and divides that number by the number of data or price points.
- Exponential moving average (EMA) – This MA gives more weight to the most recent prices or data points by adding a weighted multiplier into the equation. While a little more complicated, it keeps the moving average line close to the price changes seen on a chart.
- Weighted moving average (WMA) – The weighted moving average also assigns more weight to recent data points like EMA, but the distribution of weighting is equal where with EMA, weighting is exponential.
The two that I mainly use are the simple and exponential moving averages. So what is the difference between the two?
The SMA is a the average price over a set period of time. For example, a 20-day moving average is calculated by adding the closing prices for the last 20-days and then diving that amount by 20. This number is re-calculated as new data becomes available which makes it a “moving average.”
The exponential moving average adds another component to the process by giving more the most current prices more weight in an attempt to more accurately reflect new market data. The difference between the SMA and the EMA is most noticeable when comparing long-term averages.
The EMA reacts faster to the most current price changes due to its shorter or more responsive lag-time when compared to the SMA. To sum it up, the EMA will show you quicker price action. And I like to think of the SMA being similar to H4 or daily support and resistance.
So how do you use this thing? Let’s look at a few simple tips and strategies. Here’s six simple rules that you mat find helpful.
- Price above the 50-day moving average is considered bullish.
- Price below 50-day moving average is considered bearish.
- If the price meets the 50SMA as support and bounces upwards, you should think long.
- Price meets the 50SMA as resistance and bounces downwards, you should think short.
- If price breaks below the 50SMA, you should switch your bias to bearish.
- If the price breaks above the 50SMA, you should switch your bias to bullish.
Now that we’ve covered some basic rules, the next question is how do you trade with it? Let’s take a look at the strategies for your entry, stop loss, and take profits.
To enter a trade using the 50 day moving average, the first thing you need to do is wait for a breakout. Whenever price breaks the 50SMA, you should open a trade in the direction of the breakout. The price will usually continue in the direction of the breakout (in most cases). Below are examples of a bearish and bullish break.
The Stop Loss
The ideal place for the stop loss is above the most recent high or below the most recent low.
If price breaks above the 50SMA, you would enter the buy and place your stop below the previous low.
If the price breaks below the 50 SMA, you would enter the sell and place your stop above the previous high.
The Profit Targets
There are several different ways you can set you profit targets. One simple rule is to hold your trades until price action breaks the 50SMA in the direction opposite to your trade.
For example, if you are in a buy, you can close the trade when the price breaks below the 50SMA. If you are in a sell, you can close the trade when the price breaks above the 50SMA.
Another way to set profit targets is to use support and resistance levels. This is referred to as trading from zone to zone. And of course you can always set your own personal target goals.
When it comes to setting profit targets, I think it mainly comes down to a personal preference. I hope you find this post helpful. If you plan on trying any of the tips and strategies mentioned, come back and leave a comment. I would love to hear how they’re going.