As a trader, we're always on the lookout for effective ways to gain an advantage in the market. These ways are often based on combining different tools or indicators that we use to create a trading strategy.
Of all the indicators, moving averages are the most popular and versatile indicators that are applied to various markets and timeframes. In this article, we will focus on one specific moving average - the 50-day moving average - and explore how using it correctly can amplify your swing and positional trading success. We will not cover any strategy that traders use. However, we will highlight how the rising 50-day moving average can be added to any such strategy for taking long trades than a simple filter where price is above the 50-day moving average.
The 50-day moving average
Moving averages help filter out short-term price fluctuations and reveal the underlying trend. By plotting moving averages on your charts, you can easily identify whether the market is in an uptrend, downtrend, or sideways.
The 50-day moving average is a medium-term moving average that provides a balance between responsiveness and reliability. It is widely followed by traders and investors to gauge the overall trend of an asset.
Compared to shorter-term moving averages, such as the 20-day moving average, the 50-day moving average is less sensitive to short-term price fluctuations. This means it provides a more reliable indication of the overall trend. On the other hand, compared to longer-term moving averages, such as the 200-day moving average, the 50-day moving average is more responsive to recent price changes.
Renowned traders like Mark Minervini and William O'Neil have incorporated the 50-day moving average into their trading methodologies. Minervini emphasizes buying stocks that are in sync with the market and have a strong price structure, including the 50-day moving average. Similarly, O'Neil, famous for the CANSLIM approach, relies on this moving average as a key factor in identifying leading growth stocks during uptrends.
Importance in Positional Trading
Positional traders take a longer-term approach, aiming to capitalize on larger price moves that may last for several weeks to months. The rising 50-day moving average is valuable in this style of trading for the following reasons:
Trend Continuation: Positional traders look to ride strong trends, and the rising 50-day moving average provides a continuous indication of the market's health. As long as the price remains above the rising moving average line, it confirms the bull market's momentum, reinforcing the decision to stay invested for an extended period.
Timing of Exits: As trends are not everlasting, traders need to know when to exit a position and lock in profits. The crossing of the price below the rising 50-day moving average can serve as an early warning signal, indicating a potential trend reversal. This allows positional traders to take profits or implement protective measures to preserve gains.
Importance in Swing Trading
Swing traders aim to profit from short to medium-term price swings within an established trend. The rising 50-day moving average plays a vital role in this strategy, primarily in two ways:
Trend Identification: In an uptrend, the price typically remains above the rising 50-day moving average. Observing the price staying consistently above this line confirms the bullish trend and provides traders with a reliable signal to enter long positions. Conversely, in a downtrend, the price will often stay below the declining 50-day moving average, signaling potential short-selling opportunities.
Pullback Confirmation: As pullbacks are common in trending markets, the rising 50-day moving average acts as a support level during uptrends. When the price pulls back to this moving average line and holds, it presents an attractive buying opportunity for swing traders, offering a lower-risk entry point in the direction of the prevailing trend.
Momentum Trading: Pullbacks to rising 50-day moving average is not the only strategy followed by swing traders. When the uptrend is strong, momentum traders trade bull flags, pullbacks to 10-day & 20-day moving averages, IV-pause-move and many other setups for short bursts of upswings. Here also, the underlying criteria that the 50-day moving average should be rising is important.
If you examine the chart of CYIENT Limited, you will see that multiple successful trading setups could have been executed on the rising 50-day moving average. Conversely, ignoring the declining moving average would have spared the trader from unnecessary stop losses and frustration.
A simple strategy that can enhance the performance of swing traders is to follow the direction of the 50-day moving average on Nifty500. By staying in the market when Nifty500's 50-day moving average is rising and avoiding long positions when it is declining, swing traders can significantly improve their returns.
Pro-Setups and the Rising 50-day Moving Average
In the Pro-Setups script on TradingView, you see the 50-day Exponential Moving Average (50EMA) as a green line when it is rising and as a red line when it is declining.
In the Pro-Setups Dashboard, there are options to scan for (i) stocks where 50EMA is rising, (ii) stocks where 50EMA has just turned green in last 5 days, and (iii) stocks away from 50EMA at a certain percentage distance.
The Rising 50EMA filter can be used as an add-on to your existing scan. Combine it with filters like green trend bars, relative strength, fundamental score, mini coil, Bollinger band width, TTM squeeze etc.
The New Rising 50EMA (in last 5 days) scan gives you those names where 50EMA has turned green in the last 5 days. This enables you to find gainers early.
Stocks away from 50EMA filter lets you find stocks at a certain percentage distance away from 50EMA. This helps in finding stocks with momentum.
Conclusion
The rising 50-day moving average is a powerful tool in the arsenal of swing and positional traders alike. Its ability to identify trends, confirm pullbacks, and act as a dynamic support level during uptrends provides traders with critical insights for making well-timed trading decisions. By incorporating it into their trading strategies , traders can increase their success ratio.
Remember, a rising moving average line isn't a guarantee of profit, but it serves as a valuable guide to navigate the market's currents with greater precision.
Do you believe that Rising 50-day moving average increases the probability of a successful Long trade in Swing Trading?
Yes, rising 50-day moving average is important.
No, the direction of 50-day moving average doesn't matter.
If you have any comments, suggestions, or feedback, please feel free to share. I can be reached at puneet@pro-setups.com. Happy Trading!