Not only is it popular in the public trading market. But it is also highly compatible with other trading indicators.
Now, there are many kinds of moving averages, like the SMA and the EMA, and a variety of time frames like the 20 and 100-day. But, when it comes to accuracy and suitability for long-term investments, the 200-day Simple Moving Average wins.
And, whether you’re a first-time user of it or not, having the 200 day moving average explained is always a beneficial gain.
Lucky for you, in this article, we’ll answer all of your questions. And we’ll have the 200 day moving average explained thoroughly and descriptively.
At the end of it, you should be able to comfortably use the 200-day moving average to gain more knowledge about your securities.
What is the 200-day Moving Average?
So, what does a 200 day moving average mean?
As lightly discussed earlier, the Moving Average is a technical analysis tool used by traders to gain awareness of their investments.
Allow us to break it down for you.
Technical analysis tools predict both the future prices and movements of securities through a regular input of data.
And the Moving Average is highly effective in doing that. Plus it is also the easiest one to construct and use.
All technical analysis tools use a period of time for their functioning. And the common rule of thumb is, the longer the period, the more accurate the outcome.
This says a lot about the 200 day Moving Average since it basically covers more than half a year of trading. Plus, it only requires one section of data from your security, which is their daily market closing prices.
This is a huge difference in comparison to other tools that require an extensive amount of information. A couple of examples are volume, opening prices, and averages of other indicators.
How Does the 200-day Moving Average Work?
Now that you know what does 200 day moving average mean, let’s move on to the use of 200 day moving average.
This indicator is called the “moving” average because it produces lines whose movement indicates the condition of the security.
Moving averages usually require a set of data inputs on it. And as we mentioned earlier, all you need for this one is their closing prices. This is because it’s a simple operating indicator. Plus, the period of time has already been set.
Now, these sets of data directly translate into the moving lines of the indicator. There are two lines in the SMA, the stock price line, and the SMA line.
Looking at your candlestick chart, the stock price line is the one with a heartbeat-like pattern. While the SMA line is a solid line curving upwards.
Let’s discuss what their movements mean.
If the stock price line remains above the SMA line, it is an indication that the stock is going through an overall uptrend. On the other hand, when it goes below it, the stock is experiencing a downtrend.
When these two lines converge, it means that there is a lack of definitive market momentum. But, when they continue to separate, it is an indication of a strong trend and momentum.
200 Day Moving Average Strategy
The significance of 200 day moving average relies on the strategy you will be using.
A well-planned strategy can make the most out of it. B a common technique may lessen your odds.
Let’s discuss three of the most common 200 day moving average example strategies.
The most basic strategy for this indicator would be the Support and Resistance strategy. This is because the 200-day SMA has the ability to identify key levels in the forex market.
The forex market usually has a security price approaching and bouncing off the 200-day moving average. Then it will proceed to follow the existing trend’s direction. This is why this indicator is ideal for viewing dynamic levels of support and resistance.
Earlier, we mentioned that the 200-day SMA is highly compatible with other indicators. Which is the reason for the Moving Average Crossover strategy.
In this strategy, you’ll be using the 200-day SMA normally while also equipping another kind of Moving Average like the EMA. So once the 200-day SMA reveals a trend, you can use your second indicator to confirm the validity of the trend and assess its strength.
This moving average is also a great trend filter strategy.
It is the easiest 200-day SMA strategy. And it also produces an accurate analysis of the market trends.
How to Use the 200-day Moving Average for your Benefit?
Let’s expound on the discussion we had earlier about how the 200-day Moving Average works.
Earlier we mentioned a couple of indications that the SMA makes with its lines. This time, we’ll discuss how you should respond to those indications as a trader.
In an uptrend, the stock price should stay above the SMA line. Stock uptrends mean that the security’s price is skyrocketing. It is moving upwards and is following that pattern.
In this situation, you are encouraged to search for buying opportunities before the security’s trend reaches an end.
While in a downtrend, the stock price moves below the SMA line. This is an indication that the security is following a plummet in its price. The best response to this is to sell your owned shares to avoid bankruptcy.
So, it’s as simple as selling below the SMA line and buying above it. However, some prefer to wait and see if the trend will reverse after the 200-day period.
The image below shows NKI (Nike). The first red arrow on the left if the Covid Pandemic Pullback which took the price below our 200 Day EMA Cloud. Investors sold there positions during this time and only bought back in again when the price closed back above the 200 Day EMA Cloud. Then in March 2022, the second red arrow the price moved down below the 200 Day EMA Cloud and there was a general sell off, of the NKE Stock. Only at the start of 2023 did the price move back above signal investors to look for Buying opportunities.
200-day Moving Average Calculation
The calculation of the 200-day moving average is quite simple.
All you need to do is compile the security’s closing prices for the last 200 trading days. Then you’ll sum them up. And lastly, get their quotient over the period you’re following.
Price fluctuations occur each day, which is why it’s important to collect accurate data before calculating the 200-day SMA.