The 50 Day Moving Average has to be one of my favorite red lines (as it is usually distinguished on charts). The 50 Day Moving Average is really just what it is, “50 Day” (the last 50 days) “Moving Average” (Average movement). So, what we are looking at is a line that represents the average movement of a stock over the last 50 days. This post is for people who want to understand why they should take note of it when looking at charts. Also, it may help you understand more its meaning overall.
Now, like I usually like to do for terms that could be confused, I want to break this down (for me as well) even further to get the true thinking behind it out in the open. Let’s step away from stocks and use cheese. If I bought a random brand and expiration date of cheese every day and just left it out, I wouldn’t know when they would go bad. Well, I repeat and watch for 50 days, and after realize that most of my cheese is showing signs of mold after ten days. If I continue on day by day this average may change, but I am going to be aware of the average of 10 days (I don’t know about you but I wouldn’t wait 15 days to try some random piece of cheese). This is the exact same thinking behind the 50 MA (stands for 50 day moving average, some lingo for you), in that it shows you via a line what the average price over the last 50 days has been, so we should be aware of it so we don’t eat cheese that may have mold!
Let’s apply this to the stock market now. The 50 MA is a line that really can be support OR resistance. When a stock is trading around or on this line, it really can tell you a lot about the cheese (stock) you are about to eat (get into). Let’s say we are looking at a company whoes stock price has been just on the run up for some time. The stock has had so many up days that it hasn’t touched its 50 MA for well over 3 months. Well, we watch it and we see it starts falling towards the 50 MA, and one day it finally hits it and immediately bounces up in the same day, so what the heck? If you see this on a chart, it is because the 50 MA acted as support for the stock. Think about it like the cheese, we are always aware of the average day that cheese starts showing mold, and in the case of the stock, this average was a day that resembled strength, so as once 1 person sold their stock at the 50 MA, 10 people bought the stock. If you flip this example around, and the stock has been going down for the past 3 months, as soon as it starts to climb, the 50 MA will be a point of resistance.
This may still be confusing, I mean come on what the heck, what does cheese have to do with anything? The basic concept is what is most important, and as you start to watch stocks and look at more charts, just take note of this red line. It is extremely important because whenever a stock trades at or around this line it can really foretell where the stock is going to go next. Like the moldy cheese, it is important to just be aware of this line. If it is day 9 and our average for mold is day 10, well you aren’t going to just throw it in your mouth and say “yum”, you are going to be more cautious! In conclusion, the 50 MA line (or average price over the last 50 days) is a line that needs extra attention when run into. We don’t know for sure if the cheese is good or bad, but we do know that we need to be careful before we chew and swallow.
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