There are many exponential moving average (EMA) strategies, but the 50 EMA strategy is one of the most commonly used among traders in different financial markets. Let’s take a look at this 50 EMA trading strategy.
The 50 EMA strategy is a technical analysis trading strategy that uses the 50-day EMA to identify the direction of the trend and to generate buy and sell signals. The strategy is typically used by traders who are looking to capture medium-term trends in the market, and it is often combined with oscillators and momentum indicators.
In this post, we answer some questions about the 50 EMA strategy and backtest several 50 EMA trading strategies.
Related reading: – You might be interested in other quantitative trading strategies? (We have plenty more)
What is the 50 EMA Strategy?
The 50 EMA strategy is a technical analysis trading strategy that uses the 50-day EMA to identify the trend’s direction and generate buy and sell signals. It is a popular trend-following indicator used to identify the trend’s direction and generate buy and sell signals.
Traders will typically use the 50 EMA with other technical indicators such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD) to confirm the signals generated by the 50 EMA. The strategy is typically used by traders who are looking to capture medium-term trends in the market.
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How to Use the 50 EMA Trading Strategy
The 50 EMA is used to identify medium-term trends. An up-sloping indicator line, with the price predominantly above it, indicates an uptrend, while a down-sloping indicator line, with the price below it, indicates a downtrend.
Traders also use other indicators, such as RSI or MACD to confirm the signals. They enter long positions when the price is above the 50 EMA and short positions when it’s below.
Advantages and Disadvantages of the 50 EMA Strategy
- Simple to understand and use
- Provides clear buy and sell signals
- Can be used to identify the direction of the trend
- Can be used to capture medium-term trends
- May generate false signals in a ranging market
- May lag behind the current market price
- May not work well in volatile markets
- May not adapt well to sudden market changes
Examples of the 50 EMA Strategy in Practice
The AAPL chart below shows that when the price crossed below the 50 EMA, it traded downwards for a while. Entering a short trade, in this case, would have made us money.
Similarly, when it crossed above the indicator, it gave a long signal, and the price traded upward for some time.
However, this is just an example (anecdote) and you need to backtest it properly to determine if the strategy has merit.
Key Takeaways for the 50 EMA Strategy
The key takeaway for the 50 EMA strategy is that it is a simple and popular trend-following strategy.
It uses the 50-day EMA to identify the direction of the trend and generate buy and sell signals. While it is typically used by traders who are looking to capture medium-term trends in the market, the indicator is best combined with other technical tools for better signals.
Tips for Implementing the 50 EMA Strategy
Here are some tips for implementing the 50 EMA strategy:
- Use other indicators such as RSI or MACD to confirm the signals generated by the 50 EMA
- Use a stop-loss to limit potential losses
- Be aware of the market conditions and adjust your strategy accordingly
- Be patient and disciplined; don’t overtrade
- Diversify across different markets, timeframes, and strategies
What Timeframe to Use for the 50 EMA Trading Strategy
The 50 EMA strategy is typically used on medium-term timeframes, such as the 4-hour or daily charts or for daily charts.
Using a longer timeframe can help to filter out noise and provide a clearer picture of the trend.
However, it’s also important to consider the volatility of the market and the trading style, as different timeframes may suit different traders. You should always test the strategy on different timeframes and choose the one that works best for them.
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What Indicators to Use with the 50 EMA Strategy
When implementing the 50 EMA strategy, it’s recommended to use additional indicators to confirm the signals generated by the 50 EMA. Some popular indicators to use with the 50 EMA strategy are:
- Stochastic Oscillator
- Bollinger Bands
- Fibonacci retracements
How to Identify Entry and Exit Points with the 50 EMA Strategy
It depends on your strategy — whether you are combining the 50 EMA with other indicators.
However, many traders enter a long position when the current market price is above the 50-day EMA, indicating an uptrend, and exit when the market price falls below the 50-day EMA, indicating a downtrend.
Similarly, a short position is entered when the market price is below the 50-day EMA and exited when the price rises above the 50-day EMA.
You need to backtest to find the proper settings and indicator to combine with the 50 EMA:
What Factors to Consider When Analyzing 50 EMA Strategy Results
When analyzing results from using the 50 EMA strategy, it’s important to consider the following factors:
- The market conditions
- The trading style — day trading or swing trading
- The performance of additional indicators
- Whether the use of stop-loss orders has been helpful
- The overall performance in terms of profit and loss, winning and losing trades, and risk-reward ratio
How to Balance Risk Management and Reward with the 50 EMA Strategy
To balance trading risk management and reward with the 50 EMA strategy, traders should consider using stop-loss orders to limit potential losses and take-profit orders to lock in gains. While setting stop-loss and take-profit orders, traders should maintain a proper risk-reward ratio, meaning that the potential reward should be higher than the potential loss. Additionally, diversifying the portfolio can help to balance risk and reward.
That said, we have backtested tens of thousands of strategies, and rarely do we see that a stop-loss improves a strategy. You need to be smarter than that. How can you avoid a stop loss? We have written about the pros and cons of stop loss.
What Tools Can Help You Implement the 50 EMA Trading Strategy?
The tools that can help you implement the 50 EMA strategy include:
- Trading platforms for placing trade orders through the broker
- Charting software to receive real-time charts
- Risk management tools for easy position sizing and stop-loss calculations
- Backtesting software for testing the strategy on historical data
- Portfolio trackers for tracking the performance of the portfolio
Which trading platform should you use? We use Tradestation and Amibroker.
What Are the Common Mistakes to Avoid with the 50 EMA Strategy?
These are common mistakes to avoid with the 50 EMA strategy:
- Not having a solid risk management plan
- Relying solely on the 50 EMA to generate signals
- Not considering the market conditions
- Not using stop-loss orders
- Not diversifying the portfolio
How Can You Get Started with the 50 EMA Strategy?
To get started with the 50 EMA strategy, you can:
- Research and study the strategy and its concepts
- Learn about the market conditions and the different indicators that can be used in conjunction with the 50 EMA
- Use a demo account to practice implementing the strategy and test it in different market conditions
- Set up a trading plan, including a risk management plan
- Start with a small amount of capital and gradually increase it as you gain more experience
- Keep track of your performance and adjust the strategy accordingly
What Are the Benefits of the 50 EMA Strategy for Long-Term Trading?
The 50 EMA strategy offers several benefits for long-term trading:
- Helps to identify the direction of the trend and generate buy/sell signals
- Can be used to capture medium-term trends in the market
- Simple to understand and use
- Provides clear entry and exit points
- Can be used in conjunction with other indicators to confirm signals
- Can help to limit potential losses using stop-loss orders
- Can be adapted to different market conditions and trading styles
50 EMA trading strategy backtest – does it work?
Let’s look at a specific 50 EMA trading strategy with setup and trading rules.
First, let’s backtest a moving average crossover system with the following trading rules:
- When the close crosses above the 50-day EMA of the close, we go long.
- When the close crosses below the 50-day EMA of the close, we sell.
Relevant reading: – What is the best moving average strategy?
This is the equity curve for the gold price (GLD):
As you can see, it’s not very inspiring. It performs poorly on multiple assets, like stocks, bonds, or commodities.
Can it be improved?
Luckily, yes. If we use the 50 EMA as a filter and add a second indicator, we get a terrific result for stocks (S&P 500 and Nasdaq 100).
This is the equity curve for QQQ (the ETF that tracks Nasdaq 100):
The average gain per trade is 0.65% (450 trades), leaving much room for slippage and commissions (not included in the backtest), and the win rate is 74%. Mathematically, the win rate is not essential, but we believe it’s important due to the mental trading biases we tend to do.
An even more impressive result is the CAGR/annual return: 12.1% (buy and hold is 9%). Considering the strategy is invested only 27% of the time, we believe the results are impressive. Risk-adjusted return is 44%.
Max drawdown is 22% (in 2000/03), significantly lower than buy and hold’s 83% drawdown.
This is how the strategy performs for SPY (the ETF that tracks S&P 500):
The 601 trades since 1993 produce an average of 0.46% per gain. The annual returns are 9.2%, on par with buy and hold’s 9.8% (including dividends reinvested). The strategy is invested only 29% of the time. Risk-adjusted return is 31%. Max drawdown is a moderate 16%.
Does it work on other assets?
Our second favorite trading asset, bonds, performs decently using the same trading rules. This is the equity curve for TLT, the ETF that tracks long-term Treasury bonds:
However, the average gain per trade is a tad too small at 0.2%, even though the equity curve looks decent.
What are the trading rules?
We keep the trading rules for paying Silver members. In addition, the code is available for both Amibroker and Tradestation/Easy Language.
As a Silver member, you get a lot of trading ideas and code from our landing page of trading strategies, and additionally, you can pick some trading strategies for sale. The last bonus is access to our member articles.