We've discussed using the 50-day moving average to study market indexes. That same 50-day moving average can help you pick a stock winner and keep it winning for you.
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To refresh your memories, the 50-day moving average is calculated by taking the closing prices from the last 50 trading days, adding them together, then dividing by 50. Plotting this alongside a stock's daily movement helps to smooth out the action and give you a better idea where a stock is in a current run.
Let's take a step back, switch your chart from daily to weekly and you can smooth the action even further. Your 50-day moving average has been replaced by the 10-week moving average. It covers the same amount of time but is calculated using 10 data points instead of 50.
The 10-week average can be your secret weapon for adding to a position, diminishing it, or cutting it altogether. A leading stock should trade above its 10-week line and bounce off the line when it pulls back. A big break below the 10-week line could be a sell signal.
After a stock breaks out of a base and makes some gains, the first and second pullbacks to the 50-day or 10-week lines can provide a way to add shares. With subsequent pullbacks, there's a higher risk that the stock won't bounce back.
Be sure that the line is above the base. If you add shares at a price below the base's buy point, you could be adding to a losing cause. The moving average should be trending up, too.
First American Financial (FAF) broke out of a short six-week flat base in the middle of October 2021 with a 71.88 buy point (1).
50-Day Moving Average Offered Buy, Sell Signals
First American found 9% in gains before slowing down in late November. A five-week flat base began to form along the 10-week moving average, almost a perfect mirror of the action from October.
A sensible addition presented itself in the last week of the base, the week ended Dec. 24, 2021 (2). On Dec. 21, First American retook the 10-week moving average and stayed above it the rest of the week. That was a good show of support and provided a chance to buy or add shares.
Sure enough, First American had another 9% of profit to gain between Dec. 21 and Jan 13, 2022. It was a modest but not insignificant gain. Then, selling soon followed.
On Jan. 20, the stock broke below the 10-week moving average in heavy volume (3). In fact, there were several days of heavy selling. In this case, the 10-week line acted as a sell signal. First American tried to rebound but found resistance at the 10-week average (4), where it once found support. Later falling below the 40-week, shares sold off on earnings Feb. 10, 2022.
This article was originally published Feb. 18, 2022, and has been updated.
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FAQs
The 50-day moving average is a straightforward strategy. If prices graze the average as support and then bounce back, a trader can buy a stock. If prices rise at this average as resistance and pull back, a trader must consider selling or shorting the stock before a further decline.
How to use the 10 week moving average? ›
Look at the direction of the moving average to get a basic idea of which way the price is moving. If it is angled up, the price is moving up (or was recently) overall; angled down, and the price is moving down overall; moving sideways, and the price is likely in a range.
How do you decide buy or sell on moving average? ›
Examining a security's moving average in relation to its current price can help investors identify potential buy signals. For example, when a price breaks above an upwardly sloping moving average, this could mean it's a good time to buy a stock.
How do you find buy and sell signals? ›
The possible buy and sell signals are triggered when the shorter average crosses the longer–crossing in the upward direction triggers a possible buy while crossing in the downward direction signals a possible sell.
How to read 50-day moving average? ›
To refresh your memories, the 50-day moving average is calculated by taking the closing prices from the last 50 trading days, adding them together, then dividing by 50. Plotting this alongside a stock's daily movement helps to smooth out the action and give you a better idea where a stock is in a current run.
What is the 9 21 55 EMA strategy? ›
9/21/55 EMA Crossover Strategy
The market is uptrend when the 9 EMA is above the 21-period and 55-period EMAs. The market is in a downtrend when the 9-EMA is below the other two. To enter a long trade using this strategy, first, you look out for a cross of the 9 EMA above the 21 EMA while both are above the 55 EMA.
What is the 10-day moving average strategy? ›
The 10-day moving average strategy is a lagging one, that is, by the time averages catch up, a significant price move may have already occurred. Also, the moving averages rely on historical prices to calculate trends. But analyses show that these averages still have reasonably strong sell signals.
What is the 3-5-7 rule in trading? ›
The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.
What is the 8 13 21 EMA strategy? ›
What are the buy and sell signals in the 8, 13, 21 EMA strategy? A typical buy signal is generated when the 8 EMA crosses above both the 13 and 21 EMAs, suggesting a bullish trend. Conversely, a sell signal is indicated when the 8 EMA crosses below the 13 and 21 EMAs, suggesting a bearish trend.
Should you buy below 50 day moving average? ›
Watch for times when the price of a market leading stock breaks below the 50-day moving average on heavy volume and can't sustain a rally back above it. That may signal that buying demand is disappearing and it's time to sell.
The best way to trade moving average is to use the crossover strategy, where a shorter-period moving average crossing above a longer-period moving average generates a bullish signal, and vice versa for a bearish signal. This method helps indicate potential changes in the market trend.
What are buy and sell signals in moving average? ›
MA Crossover: Two plotted MAs are bound to crossover at various points. The point where the short-term MA crosses above the longer-term MA is a buy signal, signifying a bullish pattern. Conversely, when the shorter-term MA crosses below the longer-term MA, it's a sell signal, indicating a bearish pattern.
Which indicator gives best buy sell signal? ›
Stochastics are a favored technical indicator because they are easy to understand and have a relatively high degree of accuracy. It falls into the class of technical indicators known as oscillators. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum.
Which indicator is the most accurate? ›
Which is one of the most accurate trading indicators? The most accurate for trading is the Relative Strength Index. It is considered one of the best momentum indicators for intraday trading. It helps investors identify the shares which are bought and sold in the market.
What is a moving average buying signal? ›
A buy signal is generated when a shorter-term moving average crosses above a longer-term moving average. For example, the "golden cross" occurs when the 50-day exponential moving average crosses above a 200-day moving average.
What is the moving average indicator 50 and 200? ›
SMA stands for Simple Moving Average, a commonly used indicator showing average prices over a specific time frame. 5. When the 50-day moving average crosses 200, what does it mean? It signals a "Golden Cross," suggesting potential upward price movement and a bullish trend.
When 50 dma crosses 200 dma? ›
The golden cross is a bullish breakout pattern formed from a crossover involving a security's short-term moving average (such as the 50-day moving average) crossing above its long-term moving average (such as the 200-day moving average) or resistance level.
First American found 9% in gains before slowing down in late November. A five-week flat base began to form along the 10-week moving average, almost a perfect mirror of the action from October.
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