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Is the 50-day MA the perfect moving average for trend trading?

Is the 50-day MA the perfect moving average for trend trading?
Asked by
Karl Wolf time-icon2 weeks ago
1 Answer Answer Question

Steve Walters
Answered time-icon2 weeks ago

No perfect moving average exists, and the moving average that you choose has to be supported by the price action in the market that you are trading. Nevertheless, there are certain conditions where it is best to use the 50-day moving average for trend trading.

There are two categories of trends: volatile and non-volatile. The 50-day MA works best in stable trends that are not volatile, which are also known as healthy trends.

 

How does the 50-day moving average work?

The 50-day moving average is calculated by taking the sum of the daily closing prices of the last 50 days and dividing them by 50 to find today’s 50-day MA value. The same process is repeated each day, where the oldest value is dropped, and the current value is added to the equation to find today’s 50-day MA value. Below is an example of the 50-day moving average applied to the USOIL (West Texas Intermediate) daily chart.

Chart 1: 50-day moving average on oil daily chart

 

Using the 50-day MA to identify trade setups

As with many other moving average trading systems, a buy trade signal is generated when the price crosses above the 50-day MA, and a sell signal is usually generated when the price crosses below the 50-day MA.

Using the above formula means that you have to enter into long and short trades immediately when price crosses above or below the moving average line. However, you might be wondering what happens when you find that the price had already crossed the 50-day MA, but you feel like the trend still has a long way to go. Such cases require a different approach to identifying high-probability trade setups.

 

How to take trades long after the initial crossover

One of the best ways to get into a trend if you missed the initial crossover is to wait for a retracement or pullback to the 50-period MA before executing a trade. The gold chart below shows a perfect example of how you can capitalise on a retracement to get into a trade identified by the 50-period MA crossover.

Chart 2: Retracement trade entry on the daily gold (XAU/USD) chart

The gold chart demonstrates a common scenario where traders would have gotten a second chart to take the short trade setup that was triggered earlier by the gold price crossing below the 50-period MA line.

 

Only take trades at strategic zones

Another important aspect of taking trades after the initial crossover has happened is ensuring that you only take trades at strategic zones, which are accumulation zones. Entering into trades at zones where there was a build-up of orders increases the chances of the trade being profitable and protects you from buying at all-time highs and selling at the bottom of a trend.

Chart 3: A long trade on the USD/CNY daily chart

The USD/CNY daily chart above offers a lot of lessons on why we should not enter into trades at all-time highs and lows and why we should capitalise on accumulation zones if we want to profit from an existing trend.

The red arrows above show pullback and accumulation areas that traders should have avoided because the potential to be stuck in a losing trade was very high in such areas. The first red arrow shows an accumulation zone that occurred far from the 50-day MA, which makes it a high-risk trade setup. You should only take trades at accumulation zones that are near the 50-period MA.

The last two arrows show pullbacks that occurred again far from the 50-period MA, which also shows that they are not high-probability trade setups. You should only trade pullbacks that occur close to the 50-period MA as this minimises the risk of the trade not working out.

 

Stop-loss order placement

You should always place your stop-loss order a safe distance away from the 50-period MA to avoid being stopped out of a trend and then watching as price reverses and heads in your chosen direction. Placing your stop-loss order at a safe distance ensures that your trade will remain open, even if price whipsaws around the moving average line.

 

The bottom line

The 50-period MA offers numerous trend trading opportunities as a standalone indicator, but the best moving average is the one that you can easily follow and trade.

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