What is a Moving Average?
A moving average (MA) calculates the average price of a security over a specific number of periods, updating as new data arrives. The 50-day MA averages the last 50 closing prices, while the 200-day MA covers roughly one year of trading. When a stock's price is above its 200-day MA, it is generally considered to be in an uptrend. The S&P 500 has spent approximately 70% of the time above its 200-day MA since 1950, and returns during those periods have been significantly stronger than when below.
Types and Signals
Simple moving averages (SMA) weight all periods equally, while exponential moving averages (EMA) give more weight to recent prices and react faster to changes. The golden cross - when the 50-day MA crosses above the 200-day MA - is a widely watched bullish signal. The death cross (50-day crossing below 200-day) is bearish. However, backtesting shows these signals produce mixed results: they catch major trends but generate many false signals in sideways markets, often lagging by weeks.
Key Considerations
Moving averages are lagging indicators - they confirm trends after they have started, not before. A 200-day MA takes roughly 6 months to fully reflect a trend change. Professional traders often combine moving averages with volume analysis and other indicators rather than relying on them alone. For long-term investors, the 200-day MA can serve as a simple risk management tool: reducing equity exposure when the market is below its 200-day MA has historically reduced drawdowns, though it also reduces total returns in strong bull markets.