What makes 50 day MA so strong?
If you google 50 day moving average, the statements would be that its a popular technical indicator that investors use to analyze a stock trend.
Since its a popular indicator, millions of eyes are also looking at the 50 day MA– could this be the very reason to the success of this indicator?
I certainly don’t believe that the 50 day MA alone is the reason why price reacts to it. The secret sauce to its success would be the concept of confluence.
Confluence happens when different indicators identify a certain level to look out for.
*orange line is the 50day MA
$ACEPH, $BDO, $BPI didn’t just bounce off the 50day MA just because the moving average happened to be there. It bounced at that area because it was a previous resistance level. And a theory in technical analysis: Previous resistance turns to new support.
There’s a confluence between the 50day MA indicator and price structure (support and resistance).
$ACEX, $ALI, $MWC, didn’t just bounce simply because of the 50 day MA. Another indicator you can use to find confluence is the Fibonacci Tool. Fibonacci is used to find support and resistance levels in your charts.
You can use both price structure and fibonacci to help you find confluence in your chart. Sometimes you can see all of them create a confluence:
The examples above are a triple confluence – confluence of Fibonacci, Price Structure and 50 day MA.
Some newbies tend to trade a stock solely because the price drop is nearing the 50 day moving average.. Always remember that the 50 day moving average alone can’t be your only basis to buy or sell a stock.