The 50-day simple moving average, or SMA, is commonly plotted on charts and utilized by traders and market analysts because historical analysis of price movements shows it to be an effective trend indicator. The 50-, 100- and 200-day moving averages are probably among the most commonly found lines drawn on any trader or analyst's charts. All three are considered major, or significant, moving averages and represent levels of support or resistance in a market. The 50-day moving average is the leading of the three averages and is, therefore, the first line of major moving average support in an uptrend or the first line of major moving average resistance in a downtrend.
As noted, the 50-day moving average is widely used because it works well. The more accurate a moving average is as a trend indicator, the more useful it is for traders and analysts. The ideal moving average shows a level that price will not likely violate on a mere temporary retracement, thus possibly giving a false market reversal signal. It can also be used to place a trailing stop on an existing market position. Additionally, it is helpful if the moving average is a level that price will approach on retracements and can, therefore, be used to make additional market entries. Through trial and error using various moving averages, the 50-day moving average has served these purposes well.
In a sustained uptrend, the price generally remains above the 50-day moving average, and the 50-day moving average remains above the 100-day moving average. If the price moves significantly below the 50-period moving average, and especially if it closes below that level, it is commonly interpreted by analysts as signaling a possible trend change to the downside. The 50-day moving average crossing below and remaining below the 100-day moving average gives the same signal.