Why the 200 day moving average is important
The 200-day moving average takes the average close over the last 200 trading days, forming a line over time. Forex traders use the 200-day moving average to determine the market's long-term trend. As a result, it is the longest-moving average traders will use.
While the 200-day moving average is popular on a daily chart, traders use a 200-bar moving average on other charts like hourly or 5-minute, for instance.
Why is the 200-day moving average important?
One of the major reasons technical analysis works is because other traders believe in it and create self-fulfilling market patterns. For instance, if many traders believe the market will rise should prices move above the 200-day moving average, this will generate more buying orders and push prices higher. The 200-day moving average is written about in trading books, blogs, and analysis reports so that most traders will be aware of the 200-day moving average.
200-day moving average strategies
The 200-day moving average has four entry points like any other moving average. Below are the buy entry points; sell entry points are the opposite.
Moving average break buy
When the price closes above the downward pointing moving average, it can signal the start of an uptrend.
Moving average touch buy
Should prices return to the upward-moving average, this presents a buying opportunity to follow the long-term uptrend and buy the market. Of course, the steeper the uptrend, the more successful this strategy can be.
Moving average second cross buy
One of the most potent moving average strategies is the trend continuation buy entry pattern. When prices fall below an upward-pointing moving average, some traders will sell. Conversely, should prices move back above the moving average, the traders who just sold will look to buy, along with trend traders looking to enter new buy entries.
Moving average gap buy
Should prices move significantly below the 200-day moving average, prices will likely be oversold and return to the moving average. This scenario is a reversal pattern buying opportunity. The required gap to enter a buy depends on the market's volatility, so historical price analysis is required.
Support and Resistance
The 200-day moving average can act as support and resistance and is helpful to improve your trade entry and exit timing. For example, long traders can look to take profits on positions should prices touch the 200-day moving average in a long-term downtrend. Alternatively, placing a stop below the 200-day moving average in a long-term uptrend can increase your chances of making a profit.
Short term trading
Short-term traders can increase their chances of making profits by following the longer-term trend. So when prices are above the 200-day moving average short-term traders will look for buying opportunities using a shorter-term moving average.
Combining moving averages
Using two moving averages together is widespread and profitable in strongly trending markets. For example, when the 50-day moving average moves above the 200-day moving average, there is a buy signal. The advantage of using two moving averages is that the entry point is earlier than waiting for prices to increase above the 200-day moving average to signal a buy entry.
200-day moving average risk management
The 200-day moving average strategy is a long term trend strategy, so it is possible to earn profits at least two or three times the losses. When buying above the 200-day moving average, the rule is to hold the position until prices fall below the 200-day moving average. This strategy can lead to missed profits and larger losses than necessary.
Using support and resistance can significantly improve the 200-day moving average strategy's profitability. Place stops below daily chart support when entering a buy position, and if the market fails to surpass resistance, exit your position with a profit.
200-day moving average mental control
Using a 200-day moving average is a long-term strategy, so it takes high confidence and patience to trade successfully. Focusing on short-term price movements and results will make it much harder to follow a 200-day moving average strategy and be successful.