By Matt McCallSep 22, 2017
Yes! I love moving averages because they can tell us a lot about historical trading and give us a good idea of where the stock is (or at least should be) headed in both the near and long term. The 50-day moving average is one of the most widely-used indicators in the world of technical analysis, and yet many investors aren’t familiar with how it works or its importance in trading.
A simple moving average – the type that I use in my analysis – is the average closing price over a certain number of previous trading days. So the 50-day adds up a stock’s closing prices over the last 50 days and divides by 50. The end result is the level of the moving average on any given day.
There are a few ways I use this data in my analysis. A stock trading above its moving averages is generally considered healthy because the most recent price is above the average of that given time period. Moving averages are also important as support and resistance levels that shares will either bounce off of during a pullback or fail to break through amid a rally. That means they are great buy and sell signals as well, showing us the strength of a trend to jump on or the weakness ahead so we can get out. Managing our risk is what it’s all about, and moving averages help us do just that.
There are generally three moving averages I will look at: the 200-day, 50-day and 20-day. The 200-day is obviously a much longer time frame so it is more useful in long-term investing, and if a stock is not above that line there is definitely something going on. The 50-day moving average has unquestionably become the gold standard because it’s used by both long-term investors and short-term traders in their analysis. When the market is in a strong bull run, the leading stocks will rarely pull back to their 50-days because of the momentum. That’s where we are now. It can muddy the analysis waters a bit, so that’s when the 20-day moving average becomes a more relevant and important tool because it gives us a clearer picture of how the stock has been acting or is likely to act.
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