How Do 50-Day, 100-Day, and 200-Day Simple Moving Averages Differ?
What is a Simple Moving Average?
Simple Moving Average (SMA) is the average price of a stock over a given time period. It divides the total of previous closing prices over a specific time period by the number of data points or price points. This provides the average cost of any specific (or considered) stock throughout that period.
SMA is one of the most critical indicators in technical analysis and is usually the most straightforward strategy utilized in trading. Technical analysts and day traders refer to it as "moving" since the stock price is continually changing, causing the moving average to alter as well.
How do the 50-day, 100-day, and 200-day simple moving averages differ?
Typically, the technique of computation and how the moving average is read remain the same whether utilizing the 50-day, 100-day, or 200-day simple moving average. However, the components used to calculate these averages differ accordingly and hence their effectiveness. Let us discuss these moving averages and their importance one by one:
50-Day Simple Moving Average
Often known as the "50 DMA", it is a dependable technical indicator many investors use to assess price movements. The 50-day moving average is widely used because it is a trustworthy and powerful trend indicator in the share market.
The 50-day moving average is a dividing line that depicts the stocks' technical health on the upper line and their lack of technical health on the lower line. Furthermore, the percentage of stocks above their 50-day moving average reveals information about the market's overall health. Moving averages are frequently used by market participants to discover the most profitable entry and exit points for specific equities.
A 50-day moving average is calculated by adding the closing prices from the preceding 50 days (roughly the last 10 weeks) and dividing the total number of days by 50.
Formula = [(Day 1 + Day 2 +... + Day 49 + Day 50)/50]
A trader can add extra days or periods, as well as closing prices, to gain a more comprehensive perspective of the price trend.
Importance of 50-Day SMA
This average is a straightforward and helpful indicator for displaying price patterns. Smaller price swings, on the other hand, are difficult to predict with this approach. Even so, when paired with a long-term moving average, it can provide helpful market signals. Keeping in mind the importance of a 50-day moving average, some of them are:
Many traders see this form of average as a dependable and helpful benchmark of resistance and support. While this average gives a historical snapshot of price movement, it also changes the prices at which investors acquired and sold assets in the previous 10 weeks. It mainly displays the price movement trend and range. Secondly, daily trades frequently obey the 50-day line's resistance and support areas. When these points are breached, prices rebound from the moving average line's support and resistance levels. As a result, it provides an excellent entry and exit point for traders with limited possibilities.
When prices vary in the demand zone, many investors consider this moving average a support level from which to buy stocks. Prices in a demand zone rise from below-support levels when multiple buyers come. At this point, the price usually crosses back over the 50-day moving average. This moving average of more than 50 days gives a reasonable amount of support.
When prices fall upon entering the supply zone or due to sufficient buying pressure, multiple traders place stop orders to short shares and breach the 50-day average. This average corresponds to the highest limit of the supply zone. Because the 50-day moving average frequently equals the top of the trading range for equities, it takes significant purchasing power to break through the resistance levels, making it a dependable level of resistance for exit transactions.
100-Day Simple Moving Average
A 100-day Moving Average (MA) is the average closing price over the past 100 days or 20 weeks, showing long-term price patterns.
A moving average of more than 100 days allows investors to assess how the company has performed over the last 20 weeks and helps in determining if the price trend is upward or downward. This also gives them a sense of market sentiment.
A 100-day moving average is easy to calculate. Simply add the closing prices from each day (last 100 days) and divide the total by the number of days (i.e., 100).
Formula = (Day 1 + Day 2+ Day 3...+ Day 100)/100
Importance of 100-Day SMA
Keeping in mind the importance of a 100-day moving average, some of them can be defined as below:
Stocks are very volatile investments, with prices fluctuating daily, if not minute by minute. The simplest yet vital function of a 100-day moving average is that it helps to filter out the noise in daily price fluctuations and provides an indication of where stock values may be going. When average closing prices are examined, the impact of daily price swings is smoothed out.
It provides a clearer picture in the medium term. Suppose, indeed, the MA trend line moves significantly. In that case, it indicates that overall prices are rising, yet it might also suggest that prices are reaching a high and that the trend will soon reverse. In contrast, assume that the trend line is clearly trending downward. In that instance, expenses may be observed falling and swiftly bottoming off before beginning to rebound. A trend line that moves horizontally suggests that prices are in a range.
It provides insight into the market mood. If asset prices are trading above the 100-day moving average, the market may be favourable. However, various MAs may reflect varying cost orientations. That is why investors employ crossover MA trading techniques, in which multiple MAs of varying periods are analyzed concurrently. Assume a shorter moving average, say 50 days, crosses over a longer-term moving average, let's say 100 days moving average. In such instances, it reflects a bullish attitude. When the shorter moving average falls below the longer-term moving average, it suggests a pessimistic market mood.
The 100-day moving average is sometimes used by investors as a support and resistance level. Consequently, they may place limit orders to buy a stock when it breaches the level of support represented by the moving average over 100 days before bouncing off the MA trend line. This moving average may also provide a solid resistance level for traders to place sell-limit orders. The MA also serves as the stock price ceiling before triggering sell-limit orders.
200-Day Simple Moving Average
Traders and market experts regard the 200-day simple moving average (SMA) as a fundamental indicator for evaluating general long-term market trends. It rises and falls with the longer-term price movements in the stock, commodity, or instrument being monitored.
When the price is above the 200-day SMA, it looks to function as an indefinable support level. At the same time, it appears to serve as a resistance level when it is below it.
The 200-day moving average is determined by dividing the total closing prices for each of the previous 200 days by 200, as follows:
Formula = [(Day 1 + Day 2 …. + Day 200)/200]
Importance of 200-Day SMA
The 200-day simple moving average (SMA), which spans around 40 weeks of activity, is widely employed in stock trading to evaluate the overall market trend. As long as a stock price remains above the 200-day SMA daily, it is considered an overall uptrend. A popular alternative to the 200-day SMA is a 255-day moving average that depicts the previous year's activities.
The 200-day simple moving average is just a long-term moving average and is widely used in conjunction with other shorter-term moving averages to highlight and analyze market trends. For example, comparing the 50-day and 200-day SMAs is a relatively standard approach.
Convergence of moving average lines might imply a need for clear market momentum. On the other hand, increased separation between shorter-term and longer-term moving averages usually indicates increased trend strength and market momentum. This moving average helps identify possible support and resistance points while indicating whether the trend is up or down, depending on the considerably longer period.
In addition to the combined benefits of simple moving averages, the 200-day simple moving average also depicts the following characteristics:
The 200-day simple moving average is regarded as such an important trend indicator that the event of the 50-day SMA crossing below the 200-day SMA is referred to as a "death cross", indicating an impending bear market in a stock, index, or other investment.
Similarly, the 50-day simple moving average crossing over to the upside of the 200-day simple moving average is referred to as a "golden cross", referring to the fact that a stock is considered "golden" or practically likely to gain in price once this transpires.
The 200-day SMA may also have a self-fulfilling prophecy aspect; markets react strongly to it partly because so many traders and analysts place so much emphasis on it.
An EMA (Exponential Moving Average) prioritizes recent trading days above the simple moving average, which is calculated as the average price for the selected time frame. The exponential moving average gives current pricing more weight, whereas the simple moving average offers equal importance to all deals. Regardless of the difference in computation, technical analysts use EMAs and SMAs in the same way to detect trends and overbought or oversold markets.
What is the primary difference between the 200-day moving average and the other two moving averages?
The core difference is in their data set; because the 200-day moving average has more data, it will be smoother and flatter than all other moving averages. Shorter moving averages will appear to move more, while longer ones will appear to move less.
The Bottom Line
As an informed individual or aspiring investor, one should keep an eye on the investing field. Since they are fundamentals and serve investors well in the long run, learning about 50-, 100-, and 200-day simple moving averages can assist someone in deciding which direction to travel.
For as long as investors, analysts, and money managers have put pencil to chart paper; the 200-day moving average has been a vital indication of the long-term trend. Beloved by market technicians and fundamental investors alike, the moving average approach has stood the test of time and market as one of the most popular indicators on many charting platforms. From a risk management standpoint, this indicator has historically proved itself to be a useful tool that investors can add to their toolbox to control exposure to market environments characterized by a higher-than-normal probability of loss. Despite all the potential, no indicator can be completely relied upon when trading.