Today I want to examine the moving average 200 day or 200 day moving average as most people refer to it.
The 200 day moving average is an example of a simple moving average that is normally taken to be a key indicator by traders and market analysts for defining the general long-term market trend.
A market’s price level that coincides with the moving average 200 day is considered to be a major support level when the price is above the 200 day moving average or resistance level when the price goes below the 200 day simple moving average level.
The moving average 200 day, which covers the previous 40 weeks of trading, is normally used in stock trading and forex trading to help determine the general market trend.
As long as a stock or currency pair’s price stays above the 200 day SMA on the daily time frame, the stock or currency pair is basically considered to be in an overall uptrend.
The 200 day moving average is largely used by forex traders as it is considered to be a good sign of the long term trend in the forex market.
When the price is constantly trading beyond the 200 day moving average, it can be seen as an upward trending market.
Markets that consistently trade below the 200 day SMA are viewed as being in a downtrend.
Calculating the 200 Day Moving Average
You can calculate the 200 day moving average by taking the average of a security’s closing price over the last 200 days
[(Day 1 + Day 2 all the way to Day 200)/200]
On the outside, it looks as if the higher the 200 day moving average goes, the more bullish the market goes, and the lower it goes, the more bearish the market.
Practically, however, the opposite is true.
Very high readings are a caution that the market might soon reverse to the downside. High readings reveal that traders are way too optimistic.
When this happens, new buyers in the market are mostly few and far between.
In the meantime, very low readings mean the opposite; the bears are in control, and a bottom is near.
When the moving average is shorter, change in the market can soon be expected.
However, there is this tendency of beginner forex traders who will end up joining when a trend is almost over. They tend to believe that the market will continue to move just because the moving average 200 day is below or above the trend depending on whether they are aiming for a buy or a sell.
It is good not to enter the market blindly, and ensure that there are other signals you are checking. Among them is the momentum of a trend.
Honestly, you do not even need an indicator to tell you that the momentum is dying. This is something that you can easily observe by just looking at a naked chart.
Why the 200 Day Moving Average Matters
Moving average 200 day is taken to be the separating line between a trend that is very healthy and another that is not.
Also, the percentage of stocks or currency pairs above their 200 day moving average helps in determining the general health of the market.
Many market traders also make use of moving averages to define profitable entry and exit points into individual securities.
This works for those traders that have devised their trading plan around the moving averages.
How to Incorporate the Moving Average 200 Day in Your Trading Strategy
Using the 200 day MA to Increase your Winning Rate
The 200 day MA is a long-term indicator; hence it can be used to identify and trade with the long-term trend. This is a great opportunity for traders looking for a high risk to reward ratio.
When the price is high past the 200 day moving average, you can start to search for buying opportunities.
If the price is below the 200 day moving average indicator, then you should look for selling opportunities.
This means that most of the time, you will be placing your trades in the appropriate direction hence improve on your winning rate.
A high winning rate is good for a trader since it helps in boosting the needed trading confidence.
Using the Moving Average 200 Day as Support and Resistance
The 200 day MA can be used to identify key levels that have been respected before in the forex market.
Mainly in the FX market, the price will approach and bounce off the 200 day moving average and proceed in the direction of the continuing trend.
Therefore, the moving average 200 day is seen as dynamic (potent) support or resistance level.
There is an example below to show how price approached and bounced off the 200 day moving average on the EUR/AUD chart:
Traders will want to go long as the price bounces off the 200 day MA, and this is when the market is moving upward.
Similarly, traders are looking for opportunities to short the market after price bounces off the 200 day MA in a downward trending market.
Stops can be positioned below the 200 MA in an uptrend and above the 200 day MA in a downtrend. Ensure that you give your stop loss a breathing space, and not place it in line with the moving average.
This is what most newbie traders do, and they end up being stopped out, and the market continues to move in their direction.
This really feels bad, right? You had analyzed the market appropriately, but the level that you place your stop loss takes you out of the trade, and then the market moves in the direction that you had anticipated.
Stop striving to place tight stops with the objective of improving your risk to reward ratio. It does not make sense at all. I don’t know why many beginner forex traders do this.
Always lookout for the key areas where the market is likely to react and ensure that your stops have a breathing space either above or below that area, depending on the direction of the trend.
Using 200 day MA to time your Entries
You maybe think that it is not that hard to identify the trend, but if I may ask when is the best time to enter a trade?
Below are some of the techniques you can use for your entries with the help of the moving average 200 day.
- Support and Resistance
- 200 moving average bounce
- Bull Flag
- Ascending triangle
Support and Resistance
The resistance level is the area on the chart where possible selling pressure could come in.
The support level, on the other hand, is an area on the chart where potential buying pressure could step in.
When the price is above the 200 day moving average, you can search for buying opportunities at support, and when the price is lower than moving average 200 day, you can search for selling opportunities at resistance.
These are favorable entry levels since the probability of the market moving in your direction is high.
200 Moving average Bounce
When there is a weak trend, the moving average 200 day can be an area of value.
As you may notice, the price approaches the 200 SMA and then “bounces” away, presenting an opportunity to enter into the markets.
It is good to note that you will always have a higher probability of entering winning trades when the 200MA bounce also matches with nearby resistance or support level.
The bull flag represents a form of a bullish chart pattern. It is a symbol of strength as the buyers are in charge with the sellers are having a hard time pushing the price lower, and that is why the pullback contains small-bodied candles.
Therefore, in an uptrend market, you can look for a bull flag pattern and ensure to buy the break of the highs. Similarly, you look for a Bear Flag pattern in a downtrend and short the break of the lows.
I will give you a trick in case you are trying to trade a bear flag or bull flag pattern. Always time when the market has just broken a prevailing range.
This is usually the first pullback or retracement after the breakout, and then you can make your entry.
Actually, waiting for a pullback after a breakout ensures that you don’t fall victim to false breakouts. There are times when you will not have a pullback, but it’s okay, just let that go. Never try to chase the market. More trading opportunities will always come along. As a forex trader, being patient is among the virtues that will ensure you end up being profitable in the long run.
Descending Triangle and Ascending Triangle
An Ascending Triangle represents a bullish chart pattern. It’s a symbol of strength as the buyers willingly buy at higher prices even though they are approaching a resistance.
Therefore, in an uptrend, while the price is above moving average 200 day, you could be looking for an Ascending Triangle and then buy the breakout.
You will be looking for a downtrend, and then short the breakout.
There is something I have noted in my years of trading. The longer it takes the Ascending Triangle or Descending Triangle to form, the stronger or harder the breakout is.
This is something you should be looking out for.
In an example:
I hope today you have learned something about the moving average 200 day. You have learned what a 200 day moving average is and how to use it when executing your trades.