Follow the Trends with 50-Day Moving Average and Locate the Strong Trade Setups
We have been analyzing different forms of Moving Averages and their many benefits. The difference in time period is what makes plotting different types of Moving Average a challenge and brings about striking difference in their final outcome. Different kinds of Moving Average denote widely different results. While some are used to identify long-term trends, there are others which are better measure of short-term trends. The 50-Day Moving Average is somewhere around the mid-point bringing forth both long and short-term trend indicators within its ambit. So how would you exactly define a 50-day Moving Average?
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Defining The 50-Day Moving Average
In simple terms we can define this as a technical indicator that is used to identify price trends based on the average rate at which at an entity closed over the past 50 days. Thus inherently it is a trailing index based on past price trends. This point or at the average rates often work as support or resistance zone for a variety of other trades with the same currency pair. A peculiar aspect of this moving average is that when prices rise, the 50-day Moving Average will always be below the price while it is seen above the current price of the currency pair in case there is a downward move.
At best it is an indicator of the immediate term with implications over the longer term if studied in perspective with the 200-day Moving Average.
How To Calculate The 50-day Moving Average?
In terms of a mathematical formula to calculate the 50-day Moving Average, it is nothing but the average price of the specific currency under consideration over 50-days. You need to add up the rates at which the currency closed over the last 50 days and simply divide by 50. Currently it is a simple automated process supported by most software that is used to analyze technical trends. To smoothen out the price curve, what you can do is overlay this moving average chart over a price chart to cut out the focus on daily price fluctuation.
Illustrating with example to clarify my point, this is how you would calculate the 50-day Moving Average:
Add up the closing rates of the currency from Day 1 to Day 50 this way:
Day 1+Day 2+Day 3…..+Day 50= X
Now divide the sum X by 50.
The resultant product is your 50-day Moving Average.
Interpreting The 50-day Moving Average
On an average during an uptrend in the market, prices tend to remain above the 50-day Moving Average and two or more market close above this crucial mark in an indicator of the beginning of an uptrend in the markets. And a pullback when coupled with strong volumes on the upside and lower volumes at lower prices indicate healthy uptrend in the market. As investors, you need to take a cautious approach and time your entry or exit well during such a pullback. They give you additional entry and exit points.
Another interesting fact about interpreting this 50-day Moving Average is what happens when prices continue to rise. On the face of it you might assume that a higher reading on the 50-day moving average would signify a bullish trend and a downward move, an indicator of bearishness but that is not the case.
Very high readings on the 50-day Moving Average chart are actually a warning for the traders that a reversal is in the making and a downward trend might follow soon. Generally it is also a signal of euphoria in the trading place and also shows the presence of very few new buyers. Similarly extremely low readings are indicators of a turnaround in the markets and show that bears are gradually in abeyance. These low readings also show that the market is close to forming a base and a new upside might be looming up in near future.
Another interesting trend is when two key moving averages cross road. What happens when the 50-day Moving Average breaches the 200-Day Moving Average? This point is famously known as the Golden Cross. When this short-term measure breaches the long-term indicator it is generally seen as a sign of good times and a reign of the bulls is expected. This fact is generally further reiterated by the very high trading volumes seen at such a crossroad in the market. The opposite or the inverse of this situation is called the Death Cross in the market.
Importance Of The 50-Day Moving Average
Now we reach that fundamental question, why do we need the 50-Day Moving Average? Why does a trader need to keep track of this key number? Well, that is because the chart is a crucial dividing line between the healthy and not so healthy zones in the market.
Also another collective data that can be easily accessed through this key measure is the percentage of the total currencies trading above their 50-Day Moving Average is also indicative of the overall health of the market. Higher the number, the better it is.
Also for many traders, this also signals the key entry and exit points to enter and exit the market. It gives them indication about the kind of price range that can form a good place to enter the market or the exit point where their losses are minimized or the profit is preserved.
Effectiveness Of The 50-day Moving Average As A Market Indicator
Now that we have discussed so much about the relevance of this point breaking and the importance it holds for a trader, my next point of focus is what you should do once this key indicator is breached. Do you need to prepare for a downturn or an upmove immediately? How good an indicator it is of timing the market move?
Studies seem to indicate that probably the changes seen the financials market since the 1990s has taken off the edge of this market indicator. Its potential has seen a dip in recent times. Experts blame this on the increased popularity, better technology and ease of usage among investors. What happens as a result of this increased usage is the potential of this key indicator as a means to beat the market or stay ahead of the curve begins waning.
Yet again we draw to a close of analysis a key tool for technical analysis of the market. Though recent studies have not been very encouraging about the predictability potential of this key measure, it goes without saying the 50-day Moving average continues to be one of the most popular tools for getting a sense of the market trend. At the end of the day, one must remember a tool is just a mere facilitator, how effective it turns out to be is more dependent on its user’s ability. If you are alert, aware and engage earnestly in your trade, the 50-day Moving Average will continue to be your weapon of choice to get around the short-term roadblocks that might come up.
Identifying The Resistance And Support Points
Like I was mentioning earlier, though the 50-day Moving Average is a short-term measure of market mood, it is a good measure of the support and the resistance points of a specific currency under consideration. Depending on the trading bias in the markets it can be either the point from which the currency goes on to make higher highs or the point from where it starts the downward reversal. It can either be the entry or the exit point in trade and give a definitive indication to traders with regard to how best they can position the trade.
Now, let me show you some examples of the 50-day Moving Average trade setups on the daily chart. Please open a EUR/USD daily chart and add a 50SMA on it. This is how the 50-day Moving Average trading system works:
To go long:
1. Wait for the price to break above the 50SMA and stay above it.
2. Wait for the price to go down and retest the 50SMA and start going up again while the 50SMA is ascending.
3. Go long and set the stop loss below the last low the price made while retesting the 50SMA. Set a 2xSL target at least. Or you can hold the position as long as the price is moving above the 50SMA.
It really works when the market trends strongly. It becomes a little difficult to trade when the market moves sideways. You have to wait for the market to form a strong trend first and 50SMA starts ascending, if you want to have less number of false trade setups.
Please look at the below chart. The market is going sideways on the yellow zone, and although the price breaks above the 50SMA and goes down to retest, it doesn&8217;t go up strongly. However, the best trading opportunity formed when the price retested the 50SMA while it has already started ascending:
Another strategy to have less number of false trade setups while trading the 50-day Moving Average is that you go long when all the above requirements are met AND there is a resistance breakout too. Below, is the same ranging market again. However, as you see the proper long trade setup I showed you above, formed when a resistance breakout had already occurred:
To go short:
1. Wait for the price to break below the 50SMA and stay below it.
2. Wait for the price to go up and retest the 50SMA and start going down again while the 50SMA is descending.
3. Go short and set the stop loss above the last high price made while retesting the 50SMA. Set a 2xSL target at least. Or you can hold the position as long as the price is moving below the 50SMA.
Like long trade setups, you can wait for a support breakout if you like to have less number of false short trade setups. As you see on the below chart, price has broken below 50SMA and a support line, almost at the same time. Then, it goes up to retest 50SMA several candlesticks after, and it goes down while 50SMA was descending.
Add the 50SMA to the other currency pairs&8217; daily charts and see if you can locate any trade setup. The above short trade setup is the last trade setup that EUR/USD has formed. Since the short trade setup formed on 2014.07.02, EUR/USD has moved down for about 1400 pips. And, here is the short trade setup formed on USD/CHF daily chart almost at the same time that the last short trade setup formed on EUR/USD daily chart:
A too strong long trade setup on USD/JPY daily chart after several days of moving sideways:
As you see it is a strong and effective trading system. There are some trade setups forming with some currency pairs right now. I hope you can locate them and wait for the setup to form.
The most important thing you have to keep in mind to avoid taking the false setups is the 50SMA direction. When a long trade setup forms, 50SMA has to be ascending already, and visa versa for the short trade setups. You can also take the advantage of technical analysis and support/resistance breakout to become able to take better trade setups.