The 50-day moving average strategy can be a good way to trade in line with the mid to long term trend because it represents about 20% of the trading days in a calendar year, or around two and a half months. When you trade in the direction of the trend, you can give your trading strategy an edge and have the potential to catch some big market moves. However, there is more to it than simply buying above the 50-day moving average and selling below it. Here I will present a few different ways in which you can implement the 50-day SMA into your forex trading strategies.
What is the 50-day moving average?
The 50-day moving is a technical indicator used by forex traders to analyse the price trend of a currency pair. It’s simply the currency pairs average closing price over the previous 50 days. The general consensus is that when price is above the 50-day SMA, the market is said to be in an uptrend (bullish). If price is below the 50-day SMA, the market is in a downtrend (bearish).
How to calculate the 50-day moving average?
The 50-day moving average is calculated by summing up the past 50 data points and then dividing the result by 50. You can calculate the 50-day moving average by adding up the closing prices from the last ten weeks and divide the sum by the total number of days that is 50 [(Day 1 + Day 2 + Day 3 + … + Day 49 + Day 50)/50].
How to trade with the 50-day moving average?
This does not mean we should instantly buy when price is above the moving average or sell when price is below it. Instead, it can be utilised as a filter for us to decide in which direction we will trade. We can then use other technical analysis and price action analysis to time our entry in line with the overall 50-day moving average trend. A crossover of the 50-day SMA can also be used as an exit point to get out of a trade before the market turns around.
50-day SMA and 200-day SMA Golden Crossover
The golden crossover is one of the most well-known ways in which forex traders use the 50-day moving average. Basically, if the 50-day SMA crosses above the 200-day SMA, this is a strong bullish signal referred to as the “golden cross”. You could enter it blindly, but I would personally wait for a pullback and continuation of the uptrend to confirm the trade.
- 50 SMA above 200 SMA
- Price action showing bullish signals
- Confirm entry with other indicators
- Stop loss below recent support or 50/200 SMA
In this EUR/USD daily chart, you can see that the 50 SMA crossed above the 200 SMA which shows the start of a strong uptrend. The ADX crossover could have been used to confirm entry as the +DI is above the -DI and the main signal line being above 20 shows strong momentum. There are bullish candlestick patterns including inverted hammers and spinning tops. Price also broke through a resistance level on its way up. The stop loss could have been just below the swing low which is around 100 pips. The trade went on to make over 1,000 pips before turning around for a death crossover entry which we will look at next.
50-day SMA and 200-day SMA Death Crossover
The death crossover is the opposite of the golden crossover. It still uses the same 50-day and 200-day moving averages, but instead is an indication of there being a bearish trend when the 50-day SMA crosses the 200-day SMA in a downwards direction. Again, you can take the death crossover as it is, but I would prefer to wait for a pullback and time my entry using other market analysis.
- 50 SMA below 200 SMA
- Price action showing bearish signals
- Confirm entry with other indicators
- Stop loss above recent resistance or 50/200 SMA
You can see from this EUR/USD daily chart, that the 50 SMA has crossed down through the 200 SMA which signals the start of a quite significant downtrend. We could have timed entry by waiting for the price to pullback to the recent resistance level which it then bounced from. The stochastic crossover confirmed the trade and plenty more entry opportunities during this sustained downtrend. There were also lots of bearish candlestick patterns including shooting star formations. The stop loss could have been around the 200 SMA which is about 100 pips. This is great considering the trade moved over 2,000 pips. The 200 SMA can also be used to move the stop loss and lock in profits on the way down.
50-day moving average strategy Pros & Cons
Pros
- Catch some long-term trends
- No need to watch the charts all day
- Easy to understand and implement
- Can be combined with different chart analysis
- Any currency pair or chart timeframe
Cons
- Will be false signals
- Requires additional confirmation
- Need to time your entry
- Needs sensible money management
Conclusion: is the 50 moving average strategy a good one?
Yes, the 50-day moving average is a vital part of many trading strategies. This is because it is one of the most popular moving averages that is watched by plenty of retail and institutional forex traders. This means that you will often see price either bounce off of the 50-day SMA or start forming a new trend when it is breached. It can work especially well when combined with the 200-day SMA.
That being said, it does require you to time your entry and exit. You will also need to have good forex money management and trading discipline. You can use the 50 moving average strategy on any currency pair or chart timeframe. I prefer the major currency pairs such as the EUR/USD as I find that they tend to have plenty of liquidity which means that there can be some big trends.
I would look to trade on the 1-hour charts and above, simply because I feel that this helps to filter out some of the price noise from the lower chart timeframes. It also means less time chart watching and bigger move potential.
If you like the sound of the 50 SMA strategies, you could always try them out on a free forex demo account and see how things go. This can be a great way to practice your trading strategies and build your confidence without taking any risk. You can get a forex demo account from most forex brokers.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
