How Traders Use the Powerful 200 Day Moving Average Indicator
The 200 day moving average is one of the most watched trading indicators for gauging the overall long-term market trend. This historical price filter provides an objective measure of whether a security is trading in an uptrend or downtrend based on the average closing price over the last 200 days.
In this comprehensive guide, we’ll break down what the 200-day moving average is, how it’s calculated, how traders use it to identify trends and key support/resistance levels, recommended strategies for trading with the 200-day MA, and much more. Read on to become an expert in using the 200-day moving average indicator in your trading.
What Is the 200-Day Moving Average?
The 200-day moving average, often abbreviated as 200 day MA or 200 MA, is a technical free indicator that plots the average closing price of a security over the last 200 trading days, typically trading days rather than calendar days.
As the name implies, 200 trading days equates to roughly 40 weeks or 10 months of typical market activity. So the 200 day MA provides a view into the prevailing long-term trend of a security based on an average of the prior year’s price action.
The 200-day MA is one of the most watched indicators by serious traders across stocks, forex, cryptocurrency, commodities, and other markets. Along with its longer-term cousin the 500-day MA, this key indicator provides helpful context into overall market conditions over time rather than just short-term fluctuations.
How the 200-Day Moving Average Is Calculated
The 200-day moving average is calculated by taking the closing prices over the last 200 trading days, summing them up, and dividing by 200. For example:
- Day 1 closing price: $25
- Day 2 closing price: $24
- Day 3 closing price: $26
- Day 200 closing price: $30
Sum of 200-day closing prices = $5,000 $5,000 / 200 = 200-day MA of $25
As each new closing price comes in, the earliest closing price drops out of the calculation, so the 200-day MA “moves” over time. Connecting the plotted points of the moving average creates a trend-following indicator line.
Using closing prices filters out intraday volatility or gaps and provides a smooth trend filter. The 200-day lookback period aims to balance providing enough data to gauge the long-term trend while still being responsive to changes.
How Traders Use the 200-Day Moving Average
The 200-day moving average line provides traders key insights into:
- The prevailing long-term trend – Uptrend if price is above 200 MA, downtrend if price is under 200 MA
- Potential future support and resistance zones
- Crossover buy and sell signals when price crosses the 200 MA line
- Whether the current trend is accelerating, decelerating, or reversing
Seasoned traders keep a close eye on the 200-day MA in the context of their overall technical analysis to assess the strength of trends across key market indexes and individual stocks.
Monitoring the relationship between current price and the 200 MA line serves as an objective metric for defining the overall market environment and bias.
Trading Strategies Using the 200-Day Moving Average
Some examples of trading strategies utilizing the 200-day moving average:
Trend Following – Go long stocks trading above upward sloping 200 MA. Exit when price decisively breaks support under 200 MA.
Pullback Trading – Look to buy pullbacks that bounce off the 200 MA as support in an uptrend.
Moving Average Crossover – Buy when shorter term 50-day MA crosses above 200-day MA signaling bullish acceleration.
Long-Term Reversals – When the 200 MA line changes slope from up to down, it signals potential longer-term trend reversal ahead.
No indicator provides perfect signals, but the 200-day MA is one of the most time-tested methods professional traders use to define, trade, and profit from major trends spanning months to years.
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200-Day Moving Average Signals on Other Assets
The 200-day moving average indicator can be applied to any liquid trading vehicle with historical closing prices. For example:
Forex – Track US dollar index or major currency pairs like EUR/USD or GBP/USD vs the 200-day MA line.
Futures – Plot key futures like S&P 500, gold, oil over 200-day MA to define long-term trend.
Cryptocurrency – Monitor Bitcoin, Ethereum and major altcoins against their 200-day MAs.
Across any traded market, the 200-day MA provides helpful context on the prevailing long-term trend measured over approximately the last year of price action.
200-Day Moving Average Chart Example
Here is an example of the S&P 500 index large cap index with its 200-day moving average:
[Image depicting SP500 price chart with 200-day MA line]
We can observe how the 200-day MA provides dynamic support in bull markets, and acts as resistance in bear markets. Price tending to react around the 200 MA results in this important indicator becoming a self-fulfilling prophecy due to so many traders and institutions watching it.
Indicators to Use with 200-Day Moving Average
Some other indicators that complement using the 200-day MA:
50-day MA – Faster moving average line helps identify accelerating trends. 200/50 MA crossover signals major trend shifts.
MACD – MACD crossing above its signal line suggests building momentum above the 200 MA.
RSI – RSI holding above 50 signals upside momentum is intact when above 200 MA.
On-Balance Volume – OBV confirming the 200 MA uptrend shows accumulation is supporting the move.
No single indicator provides a holy grail. Combining the 200-day MA with other technical analysis indicators provides a more complete picture.
200-Day Moving Average vs Other Major MAs
Here is how the 200-day MA compares to other popular moving average lengths:
50-day MA – More responsive to price swings but more prone to whipsaws signaling false reversals.
100-day MA – Compromise between the precision of the 50-day and more long-term 200-day.
10-month MA – Closely mirrors the 200-day MA but not as universally followed.
500-day MA – Even longer trend filter but much slower moving and less reactive than 200-day.
The 200-day moving average stands out because it balances reactivity to price swings with smooth, consistent trend indications that major institutions prefer using for long-term strategic decisions.
How to Calculate the Moving Average
It’s easy to add the 200 day moving average to any chart or trading platform. Most charting software does the calculation automatically. But to manually calculate:
- Select 200 previous closing prices starting with the most recent.
- Total the sum of all 200 closing prices.
- Divide sum by 200 to get the average closing price.
- Plot the 200-day MA.
- Repeat daily, dropping off oldest data as new closes are added.
For active traders, it’s more convenient to simply pull up a chart that has the 200-day MA indicator plotted visually.
Conclusion – Key Takeaways on the 200-Day Moving Average
The 200-day moving average is one of the most essential indicators for active stock, futures, forex and crypto traders because it objectively:
- Defines whether the prevailing trend is up or down over the past year.
- Acts as potential future support or resistance.
- Signals long-term bullish and bearish momentum shifts via crossovers.
- Provides historical context to determine how stretched trends have become compared to the past year.
- Use with other indicators to confirm signals and momentum.
- Combine with shorter MAs like the 50-day for crossover signals pointing to accelerations.
- Focus on securities trading above or below the 200-day MA with conviction rather than whipsawing across it.
If you aren’t already incorporating the 200-day moving average into your trading strategy, add this long-term trend overlay to your chart today. It provides invaluable perspective into the longevity and strength of price trends across markets.