What Does this Technical Indicator Profitably Reveal?
Simply put, the 50 day moving average is the last previous 50 days of price action added together and averaged out. It is usually represented by a thin line that is drawn overtop the chart. A candlestick chart with the S&P500 for the past fifteen months with a 50 day moving average is shown here.
Using the 50 Day Moving Average Tool
But what makes this simple moving average such a great tool to follow? Here are a few reasons why:
- Can be used to spot support and resistance levels
- Assist in determining market turnarounds
- Directional indicators used in the Forex market
Why the Indicator Works
Why does this indicator work so powerfully? The answer lies with a long term habit by institutions and fund managers. These deep pocketed investors cannot buy and sell on the same signals that small time traders can. Profitably investing ten thousand dollars is far easier than trying to invest ten million dollars and have it appreciate over time.
Because of this, institutional investors often rely on simple and broad indicators to buy and sell that have proven themselves over time. The 50 day moving average is one such indicator.
How to Trade the 50 Day Moving Average
A simple method to determine a bull or a bear market is to look at one of the major index charts with this moving average overlaid. If the current price is above the moving average, the market is likely in a bull phase. If the index value is beneath the 50 day moving average, the sentiment is usually bearish. This will help an investor to time his trades with the current sentiment.
Another method to profit from this indicator is to buy when the price first bounces off the 50 day moving average line. The trader is then welcome to sell when the price pulls a fair distance away from the moving average, or when the price falls below the 50 day marker. The former is selling based on momentum, the latter is exiting when support is broken.
Of course, one should not trade this indicator unless they first determine that the stock is reacting to it. A stock with little institutional support may pay little attention to this moving average, while another stock will almost magically bounce along it.
Trading Moving Averages With a System
It is important to note that the 50 day moving average is only one tool in a trader’s belt. Once the insightful investor knows what institutional investors are doing, it is easier for him to be more precise with his buying and selling with his comprehensive strategy such as CAN SLIM. Of course, no investor worth his weight in ticker tape would ever buy and sell on the 50 day moving average alone.