What Is 50 Day Moving Average?
The 50-day moving average (also referred to as “50 DMA” is a popular technical indicator used by investors to analyze price trends. It’s simply a security's average closing price over the previous 50 days.
How Are 50 Day Moving Averages Used?
50 DMA is perceived to be the dividing line between a stock that is technically healthy and one that isn’t. Furthermore, the percentage of stocks above their 50-day moving average helps to determine the overall health of the market.
Many market traders also use moving averages to determine profitable entry and exit points into specific securities.
How to Calculate 50 Day Moving Average
To calculate the 50 day moving average, take the average of a security's closing price over the last 50 days [(Day 1 + Day 2 + Day 3 + ... + Day 49 + Day 50)/50].
What Does the 50 DMA Mean in the Stock Market?
On the surface, it seems like the higher a 50-day moving average, the more bullish the market is (and vice-versa).
In practice, however, the reverse is true: Extremely high readings are a warning that traders are far too optimistic and the market may soon reverse to the downside. When this occurs, fresh new buyers are often few and far between.
What Does a Low 50 Day Moving Average Signify?
Meanwhile, extremely low readings signify that a bottom is near. In fact, the shorter the moving average, the sooner you'll see a change in the market.