If you only learn one technical tool, it should probably be the moving average. It is the simplest way to see the trend of a stock through the noise of daily moves, and two of them, the 50 and the 200-session averages, are watched by almost every market participant.
What a moving average is
A moving average is the average of the last N closing prices, recalculated every day. Each new session adds the latest close and drops the oldest one, so the line "moves" with the price.
There are two common types:
- Simple moving average (SMA): every close in the window weighs the same.
- Exponential moving average (EMA): recent closes weigh more, so it reacts faster.
The longer the window, the smoother and slower the line. A 10-session average follows the price closely; a 200-session average (about ten months of trading) barely reacts to a bad week.
Why 50 and 200
There is nothing magical about these numbers. They became a convention because they describe two useful time frames:
- The 50-session average (about two and a half months) describes the medium-term trend.
- The 200-session average (about ten months) describes the long-term trend.
Because so many investors look at them, they also become reference points in themselves: news reports often mention when a major index falls below its 200-day average.
A simple way to read them:
The golden cross and the death cross
- A golden cross happens when the 50-session average rises above the 200-session average.
- A death cross happens when the 50-session average falls below the 200-session average.
They are popular because they are easy to see and to explain. Their main limit is that they are late by construction: two averages of past prices can only cross after the price has already moved a lot. By the time a golden cross appears, a good part of the recovery has usually happened; by the time a death cross appears, a good part of the fall has too.
In markets that move sideways the averages can also cross back and forth several times, producing signals that contradict each other within weeks. That is why the crosses are better read as a confirmation that the trend has changed than as a precise moment to buy or sell.
- 1Death cross: the 50-session average falls below the 200-session one. The decline had been going for weeks.
- 2The actual low of the price.
- 3Golden cross: the 50 rises above the 200, months after the low. It confirms; it does not anticipate.
How we use moving averages at InbestPlanners
We do not publish signals on golden or death crosses. We use the averages as filters and exits, which is where they are strongest:
1. Only in a long-term uptrend. A Bounce signal is only produced when the stock closes above its 200-session average: a sharp drop inside an uptrend is a very different situation from a drop in a stock that is already falling. The breakout rule of the Impulse method asks the same.
2. Trend structure for Impulse. The momentum rule of Impulse asks for the close to be above a fast exponential average (21 sessions), and that average to be above the 200-session one: a trend that is in order from short to long term.
3. As an exit. If the price closes below its 200-session average, the long-term trend that justified the position is broken and the position is closed.
4. To describe each market. Each of the 12 markets we cover is classified by its own index against its 50 and 200-session averages, and that state is shown as context next to new signals.
5. In the analysis. The technical ranking and the 360 Analysis score the position of the price against its 50 and 200-session averages as part of the trend.
The full rules are on the methodology page.
Three common mistakes
1. Treating the average as a support that "holds". Prices cross the 200-session average all the time. It is a reference, not a floor.
2. Optimising the length. Testing every period from 20 to 250 until one looks perfect on the past is a classic way to fool yourself. Pick a convention and keep it.
3. Ignoring the slope. A price above a falling 200-session average is a weaker situation than a price above a rising one.
In short
- A moving average smooths the price to show its trend; the longer it is, the slower it reacts.
- The 50 and 200-session averages describe the medium and long-term trend.
- Golden and death crosses confirm a change of trend, late by construction.
- Averages are most useful as filters (only trade with the trend) and as exits.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results.