Stocks course · Section 4: Charts, Indicators and Strategies
Moving Averages and the Golden Cross: How to Use the 50-Day and 200-Day
How simple and exponential moving averages are calculated, how traders use the 50-day and 200-day, and what golden and death crosses can and cannot do.
Intermediate6 min read·7:06 video·Lesson 14 of 26·quiz: 4 questions
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A moving average is the average closing price over a set number of recent days, recalculated every day, which smooths out daily noise so you can see the trend. A golden cross happens when the 50-day moving average crosses above the 200-day moving average and suggests the medium-term trend has turned up; a death cross is the opposite. Both are slow by design: they catch big trends late, and in sideways markets they give false signals.
The simple moving average (SMA)
An SMA adds up the last N closes and divides by N. Each day the oldest close drops out and the newest is added.
Example
A stock's last five closes are $20, $21, $22, $24 and $23. The 5-day SMA is (20 + 21 + 22 + 24 + 23) / 5 = $22. Tomorrow it closes at $26. The $20 drops out, so the new SMA is (21 + 22 + 24 + 23 + 26) / 5 = $23.20.
The exponential moving average (EMA)
An EMA gives more weight to recent closes, so it turns faster. Each day: EMA = previous EMA + k x (close - previous EMA), where k = 2 / (N + 1).
Example
For a 10-day EMA, k = 2 / 11 = about 0.182. If yesterday's EMA was $50.00 and today's close is $55.00, today's EMA = 50 + 0.182 x (55 - 50) = about $50.91.
Faster is not automatically better: an EMA turns sooner on real trend changes but also on noise.
Common lengths and what they show
| Length | Typical use |
|---|---|
| 10-20 days | Short-term swings; trailing stops for swing trades |
| 50 days | Medium-term trend; pullback entries |
| 200 days | Long-term trend; the line many investors watch |
The 200-day moving average
Many traders define a long-term uptrend as price above a rising 200-day moving average, and a downtrend as price below a falling one. It is also used as a market filter: some strategies only buy stocks while the S&P 500 itself is above its 200-day average. The share of stocks above their 200-day average is a quick measure of breadth; the DanioX stocks market page shows it for the 100 largest US-listed companies.
Golden cross and death cross
- Golden cross: the 50-day moving average closes above the 200-day after being below it.
- Death cross: the 50-day closes back below the 200-day.
Example
A stock bottoms at $100 in March and climbs steadily. By June its 50-day average has risen to $121 while the 200-day, still weighed down by last year's prices, is $120. The golden cross appears with the stock at about $125, already 25% above the low. That is the lag: the signal confirms a trend that has already started. The same lag means a death cross often comes well after the top.
The weakness: whipsaws
In a sideways market the two averages keep crossing as prices swing. Each cross buys after a rise and sells after a fall.
Example
Over six months a stock moves between $90 and $105 and produces three golden crosses, each followed by a death cross. If each round trip loses about 4% including costs, the rule is down roughly 12% while the stock went nowhere. Trend rules usually accept many small losses like these in exchange for occasionally catching a very large trend.
How traders use moving averages
- Trend filter: only take long trades when price is above the 200-day, or only when the 50-day is above the 200-day.
- Pullback entries: buy when a stock in an uptrend pulls back to its rising 50-day average, with a stop below a recent swing low.
- Trailing exits: sell when the price closes below a chosen moving average.
- Crossover systems: buy on the golden cross, sell on the death cross.
Writing a crossover rule you can test
A chart signal only becomes a strategy when every detail is written down:
- Universe: which stocks, for example the 100 largest US-listed companies.
- Entry: the 50-day closes above the 200-day; buy at the next day's open. Deciding on a close and buying at that same close assumes you knew the close in advance, a form of look-ahead bias.
- Exit: the death cross, a stop-loss below the entry, and perhaps a maximum holding time.
- Sizing: how much per position and how many positions at once.
- Costs: spread, commission and slippage on every buy and sell.
The DanioX stocks page runs a golden-cross rule like this on the 100 largest NYSE and Nasdaq companies, with its exact stop and time limit spelled out on the page, and the stocks backtest shows how it and five other rules did after costs against the S&P 500. Results change as new data arrives, so read them there rather than relying on any figure in a lesson.
Risk
A crossover can stay "in" through a sharp drop that happens faster than the averages can turn, which is why a crossover rule still needs a stop-loss. In a crash, a stock can fall 30% before the 50-day average even starts to bend.
Do moving-average rules work?
The evidence is mixed. A well-known study by Brock, Lakonishok and LeBaron (1992) found that simple moving-average rules had predictive power on the Dow Jones index over almost a century of data. Later work warned that testing many rules on the same data can produce winners by chance, and found weaker results in more recent data and after trading costs. The fair conclusion: moving-average rules can help you stay with long trends and step aside in long declines, but they are not a reliable money machine, and each rule must be tested honestly (see backtesting stock strategies).
| Strengths | Weaknesses |
|---|---|
| Simple, objective, easy to test | Late entries and exits |
| Keeps you in long trends | Whipsaws in ranges |
| Can sidestep long bear markets | Can lag badly in fast crashes |
Tip
Open a long-term chart of any large stock, add the 50-day and 200-day averages and count how many crosses happened in the last five years. Then note which ones would have made money. It is the quickest way to feel both the strength and the weakness of the rule.
Next: two more indicators every stock trader should know, in RSI and ATR.
Key takeaways
- A moving average smooths daily prices so you can see the trend; it always lags the price.
- Price above a rising 200-day moving average is a common definition of a long-term uptrend.
- A golden cross is the 50-day crossing above the 200-day; a death cross is the reverse.
- Crossovers catch big trends late and give false signals (whipsaws) in sideways markets.
- A usable crossover rule needs exact entry, exit, stop, sizing and cost assumptions, then a fair test.
Quiz: check what you learned
0/4 answeredAnswer every question to finish the lesson. Wrong answers are fine: read the explanation and try again.
⚠ Not financial advice — educational signals only. Read the disclaimer.