If you tune in to financial news today, you will hear them mention the 200 day moving average.
You will hear stuff like…
“Company ABC has just closed below the 200MA, it’s time to sell”
“Buy when the price breaks above the 200 moving average”
This shows that the 200 day moving average is a highly followed indicator!
But, how should it help you as a trader?
Actually, it doesn’t help you.
It only makes you trade emotionally, sometimes wiping out all your profits from your trading account.
Other traders have also gone through the same experience.
However, after reading this article, things will change for your good!
I will be taking you through everything that you need to know about this indicator.
Let’s start…
What is the 200 Day Moving Average?
The moving average is a technical indicator that helps traders identify and analyze long term trends.
It averages your price data and is shown as a line on a chart.
To calculate the moving average, you should add up the closing prices for the last days that you want, then divide the sum by the total number of days.
For the case of 200MA, you should add up the closing prices for each of the last 200 days then you divide the sum by 200.
The following formula puts it clearly….
200 Day Moving Average = [(Day 1 + Day 2 …. + Day 200)/200]
Each new day generates a new data point.
When all the data points for each of the 200 days are connected, they give a continuous line that can be observed on charts.
Consider the following chart…
In the above chart, we have a continuous line that runs from the start to the end of the price action.
This line is the 200MA.
If you look at the line alone without the price action, you can know the trend exhibited by the price action.
This indicator is widely used by Forex traders because it’s a good indicator for long term trends in the market.
If the price is consistently trading above the 200MA, the price action is considered to be an uptrend.
On the other hand, if the price is consistently trading below the 200MA, the price action is considered to be a downtrend.
Consider the following chart…
The above chart shows both an uptrend and a downtrend.
The uptrend is where the price is trading above the 200MA.
The downtrend is where the price is trading below the 200MA.
These two have been shown using red arrows.
As a trader, you can use this indicator to determine your entry or exit point.
It can also help traders know whether a currency pair is healthy or not.
This is key for any trader to run a successful trade
How to use the 200 Day Moving Average in your Trading Strategy
Always remember that the 200 day moving average is a long-term indicator.
It can help you identify and trade with a long-term trend.
Use the following principle when trading with this indicator…
If the price is trading above the 200 day moving average indicator, look for buying opportunities.
If the price is trading below the 200 day moving average indicator, look for selling opportunities.
Consider the following chart…
In the above chart, we have used the 200 day moving average to determine when to look for buying opportunities as well as when to look for selling opportunities.
At first, the price is trading above the 200 MA.
This is an uptrend, characterized by a consistent rise in the price of the currency pair.
This is the time when you should look for buying opportunities.
After some time, the price action breaks through the 200 MA in a bearish direction.
This is a downtrend, characterized by a consistent decline in the price of the currency pair.
The price then begins to trade below the 200 MA.
This is the best time for you to look for selling opportunities in the market.
If you use the above technique, you will increase your winning rate and reduce your loses.
How to Time your Entries using the 200 Day Moving Average
You now know how to identify the trend, but what is the right time for you to enter the trade?
Let me explain 3 techniques that can guide you into this…
#1: Support and Resistance
The support is the area in your chart where potential buying pressure can come in.
The resistance is the area on your chart where potential selling pressure can come in.
You can use the 200 MA to identify these two levels on your chart.
Normally in a forex market, the price will approach and bounce off the 200 day moving average then continue in the direction of the current trend.
Hence, you can view the 200 MA as a dynamic support or resistance.
If the price is trading above the 200 MA, just look for buying opportunities at the support.
This is shown below…
The above chart shows instances at which the price action approaches the 200 MA but bounces off while in an uptrend.
This a good time for you as a trader to go long by purchasing the currency pair.
In this case, the 200MA will be playing the role of support.
To stay protected, you need a stop loss order.
After entering this type of trade, make sure that you set a stop loss order.
The best place to add the stop los order is just below the 200MA.
Consider the chart given below…
In the above chart, we have a point at which the price bounces off from the 200MA downwards.
This is followed by a significant price decrease.
The point at which the price bounces off from the 200MA provides you with an opportunity to go short by selling the pair.
Again, a stop loss order is of importance.
Just place it above the 200MA and you will stay protected.
#2: Ascending Triangle and Descending Triangle
The Ascending Triangle is formed during bullish trends, making it a bullish chart pattern.
It’s an indication of strength as buyers are willing to buy at higher prices despite coming into Resistance.
If the price action is in an uptrend and trading above the 200MA, you can look for an ascending triangle then trade the breakout.
Consider the following chart…
The above chart shows the position where an ascending triangle has been formed.
If you look at the two black lines, they resemble a triangle.
The ascending triangle is followed by an increase in the price of the pair.
Anytime you spot such a formation, buy the currency pair immediately.
Note that if the ascending triangle takes longer to form, it’s an indication that the breakout is strong.
If the trend is bearish, look for a descending triangle and short the breakout.
This means that a descending triangle gives you a nice opportunity to sell the currency pair.
#3: Bull Flag
The Bull Flag is a type of a bullish chart pattern.
The Bull Flag sends a signal of a strong trend whereby the buyers are in control and the sellers are finding it difficult to push the price lower.
This results into small-bodied candles on a pullback.
If you’ve an uptrend, look for the Bull Flag pattern then buy the break of the highs.
Consider the chart given below…
In the above chart, we have identified 2 Bull Flags.
They are all characterized by a pullback and small-bodied candles.
The reason is that the sellers are trying to push the price lower, but the buyers have taken control of the market.
Hence, the sellers cannot succeed.
This presents traders with a nice opportunity to buy the currency pair.
Note that the best flag pattern to trade is the one that occurs immediately after the price breaks out of a flag, that is, the first pullback.
How to identify the Correct Market Cycle using 200 Day Moving Average
If you’ve been a Forex trader for some time, you know very well that the market keeps on changing.
It moves from trend to range, range to trend, etc.
These market changes can be broken down into 4 stages…
Advancing
Distribution
Declining
Let’s discuss them in detail…
#1: Accumulation Stage
This stage occurs immediately after a downtrend.
The price action forms a range, with both Support and Resistance.
At this stage, the 200MA will flatten and the price may attempt to fluctuate around it.
This means that the price fluctuation around the 200MA is very slight/narrow.
So, what signal does this stage send to traders?
It only means that the buyers and sellers are in equilibrium and that the market is undecided.
Consider the chart given below…
The above chart clearly shows the occurrence of the accumulation stage.
It is very clear that this stage came immediately after a downtrend.
During this period, the price is moving sideways while the 200MA is almost a straight horizontal line.
What you MUST know as a trader is that while in the accumulation stage, the market can break out in any direction.
If it breaks downwards, it means that the downtrend will continue, hence, you can look for short positions.
If it breaks upwards, it marks an end to the downtrend and a beginning of a new trend.
This takes us to the next stage…
#2: Advancing Stage
This stage is said to have occurred if the market breaks upwards right from the accumulation stage.
It appears like an uptrend with higher highs and lows.
The price begins to move upwards and the 200MA begins to point higher.
This is in contrast to the previous stage in which the 200MA was almost a straight horizontal line.
The following chart demonstrates this…
The above chart clearly shows the Advancing Stage.
As you can see from the chart, this stage occurs immediately after the accumulation stage.
It is the point at which the price action breaks in a bullish direction.
The direction of the 200MA has also changed and it’s now pointing higher.
In the advancing stage, the price action is most likely to take an upward direction.
The reason is that there is least resistance towards the upside.
As a trader, you need to take advantage of that and buy the currency pair.
There are a number of ways through which you can trade the Advancing Stage…
First, you can decide to buy the first pullback of the accumulation stage.
This is the pullback that occurs immediately after the Advancing Stage.
It is normally followed by a further price increase.
This pullback should be characterized by a range with small-bodied candles.
The following chart shows this…
The above chart clearly shows the first pullback that occurs after the Advancing Stage.
This pullback has been shown using black lines marked as First Pullback.
The pullback looks like a range, and has small-bodied candles.
This is a good time for you to buy the currency pair.
If you look at the chart, this pullback is followed by a sharp rise in the price of the currency pair.
A trade who had bought the pair will earn profit.
Secondly, you can wait for a pullback towards the previous Resistance turned Support.
Thirdly, you can look for a pullback that occurs towards the 200 day moving average.
In the above chart, this can be first or the second pullback.
In both cases, the pullbacks are followed by a sharp rise in the price of the pair.
This means that it will be profitable for you to buy the currency pair during the pullback period.
#3: Distribution Stage
No market will go up forever.
During a bullish trend, sellers will come into the market and try to push the price lower.
The trend will then become weak, which can be seen in the Distribution Stage.
It appears like a range market in an uptrend.
The 200MA is also more likely to flatten.
The price may also begin to move around the 200MA.
It’s an indication that the buyers and sellers are in a state of equilibrium and that the market is undecided.
Consider the chart given below…
The above chart shows the formation of the distribution stage in the market.
At this stage, the price is moving to the sideways.
This is clearly shown in the chart.
What you should know is that at this stage, the price can break in either direction.
If the price breaks higher, it means that the uptrend will continue.
This will be a good time for you to look for buying opportunities in the market.
If the price breaks lower, it will mark the end of the uptrend and the beginning of a downtrend.
This takes us to our next stage…
#4: Declining Stage
This marks the final stage of the market cycle.
It occurs when the price action breaks downwards right from the distribution stage.
In most cases, it appears like a downtrend with lower highs and lows.
In this stage, the price begins to move below the 200 day moving average.
The 200MA also begins to point lower, which is an indication that the price is in a bearish trend.
In the Declining Stage, you will find the least resistance in the downtrend.
This means that you should think of selling, not buying.
So, once you’re sure that the Declining Stage has started, just look for selling opportunities in the market.
Likewise,
The declining stage won’t last forever.
It must reach a point where the price will become lower to attract buyers.
The market will then transit to stage 1, that is, the Accumulation Stage
Moving Average Crossovers
Once you’ve identified a long-term trend, it will be good for you to assess its strength.
This is of importance because a weakening trend signals a trend reversal and gives traders an opportunity to exit their current trades.
The 200 day moving average is good for identifying long-term trends, but it may not tell you how strong the trend is.
That is why you should consider incorporating short term moving averages such as 21, 55, and 100 day moving averages in your trading strategy.
They will help you know whether your current trade is running out of steam since they track more recent price movements over a shorter period of time.
Consider the chart given below…
In the above chart, we have added 4 moving averages, that is, the 10, 25, 50 and 200 moving averages.
These have been shown well using marked red arrows.
The 200MA is almost a straight line.
This means that it doesn’t tell much about the strength of the trend at any particular time on the chart.
However, this is not the case with the 10MA.
The 10MA resonates well with the price action.
It has swings that correspond to swings in the price action.
This makes it a good indicator for you to know the strength of the current trend.
The 25MA also attempts to add swings that correspond to the price action, but these are not informative as those provided by the 10MA.
This is also the case with the 50 moving average .
This means that the 10MA sends a clear signal regarding the strength of the trend than other moving averages on the chart.
So, always add the short-term MAs to your chart whenever you need to know the strength of a trend.
They can help you know when the market is about to reverse. The reason is that the strength of a trend can tell much about the direction the market is about to take.
You can then take the appropriate action before it is too late.
-The 200 day moving average is an indicator that helps traders identity long market trends.
-The 200MA is a good trend filter.
-Look for buying opportunities when the price is trading above the 200MA.
-Look for selling opportunities when the price is trading below the 200MA.
-Use the 200MA to determine the 4 stages of the market. You can then time your entries and exits using those stages.
-After the end of the last stage, that is, the Declining Stage, the market returns to the first stage, that is, the Accumulation Stage.
-For long positions, place the stop loss order just below the 200MA.
-For short positions, place your stop loss order just above the 200MA.
-The 200MA can be viewed as dynamic support or resistance.
-The 200MA alone cannot tell you how strong a market trend is.
-Due to this, always combine the 200MA with shorter term moving averages.
-These give a clear signal regarding the strength of a trend.
They also send an early signal when the market is about to change direction
1 Response to "The 200 Day Moving Average: Full Guide"
hi chris i follow you from instagram, this is one of the best articles i have ever read simple and clear, you are the best teacher i have ever known, god bless you.