Everything You Need to Know About the 200-Day Moving Average

Deciding when to enter or exit a market can be challenging. If you’re looking for clues on when to trade, the 200-day moving average (MA) is a simple but powerful tool you can integrate into your stock trading strategy. This technical indicator factors in recent prices to identify price trends in an asset. 

Let’s explore why the 200-day MA is widely used, how it works and how to use it to your advantage.

What Is the 200-Day MA?

Also known as the 200-day simple moving average (SMA), the 200-day MA is a popular indicator used to assess the price trend of a security's price. It calculates the average of a security's closing prices for the last 200 days and charts the averages on a rolling basis.

The 200-day MA is just one of many technical analysis indicators used to analyze price moves. But it’s widely followed because it covers 40 weeks of trading, which includes most of the year.

If the security's price is trading above its 200-day MA, it is generally considered to be in an uptrend. If the security's price has been consistently rising over the last 200 days, it may continue going up.

But if a security breaks down and falls below a 200-day MA, it may be beginning a downward trend.  However, always keep in mind that past performance does not guarantee future results.

The Golden Cross and the Death Cross

A shorter-term MA is the 50-day, which averages 50 days of closing prices to create a MA. When the 50-day MA crosses above or below the 200-day MA, the stock is in an uptrend or downtrend, respectively. The bullish signal is the golden cross and the bearish signal is called the death cross. Both signals compare the shorter-term trend versus the longer-term.

Exponential Moving Average (EMA)

Like simple MAs, an exponential moving average (EMA) is a calculation that traders use to help predict support and resistance levels. The goal is to estimate where prices are headed. But unlike an SMA, which gives equal weight to each day when calculating the average, an EMA weights recent periods more heavily.

As a result, the EMA is more sensitive to recent price action, which can sometimes help traders identify market trends more quickly than an SMA. Traders looking to capitalize on short-term price movements may prefer the EMA, while investors searching for a longer-term trend might focus on the SMA.

200-Day SMA Formula

To calculate the 200-day SMA, add the closing price of each day from the last 200 days and divide the sum by 200. The formula for calculating the 200-day SMA is:

200-day SMA = (Close Price Day 1 + Close Price Day 2 + ... + Close Price Day 200) / 200

The 200-day SMA is recalculated every day by adding the current day's closing price then removing the closing price from 200 days ago. That sum is then divided by 200 to calculate the average.

How to Interpret the 200-Day MA 

Here are a few trading strategies that use 200-day MA.

200-Day MA Bounce

Since the 200-day MA can serve as a support level or resistance level, you can see if prices bounce off the MA and potentially use it as a trading signal. 

For example, if a stock price has been trading below the 200-day MA but breaks out above it and starts to rise, it might be considered a buy signal. The same idea applies to the downside.

Support and Resistance

Traders often use the 200-day MA to find key support and resistance levels. Support and resistance are points on a stock chart where the price tends to  not fall much further (support) or has a difficulty moving any higher (resistance).

By estimating the average price of a stock over the previous 200 days, the 200-day MA smooths out price variations to help analyze longer term stocks. A stock is often seen as being in an uptrend when its price is higher than its 200-day MA. In contrast, the price is regarded as being in a downtrend when it is below the 200-day MA.

For example, if you are considering buying shares at company ABC and you notice that the closing price keeps clustering around the 200-day MA level, you might enter a buy order at the 200-day MA.

If a stock that you own keeps approaching the 200-day MA from below and dropping, it could be meeting resistance with a cluster of trades at that level. You might decide to sell your shares, anticipating that the resistance level will hold and the price will struggle to break through, potentially leading to a downward trend.

The 200-Day MA as a Stock Market Indicator

As a stock market indicator, the 200-day MA is an easy-to-follow tool, although it does have drawbacks. 

Advantages for SMAs

Moving averages are important tools in technical analysis. Traders and investors use them to smooth price data and spot trends. Simple moving averages (SMAs) are popular because they are easy to calculate. SMAs average a set number of past prices, which reduces short-term fluctuations. This helps users focus on the overall trend of a security. They can improve decision-making by giving clear signals for entry and exit points. Simple MAs fit into various trading strategies. This makes them useful for beginners and experienced traders alike. In the following sections, we will explain why traders should use simple moving averages.

Simplicity and Ease of Interpretation

Simple moving averages are easy to calculate and grasp. They clearly show the average price over a certain period, helping traders and investors spot trends and make decisions without needing complicated analysis.

Smoothing Price Data

SMAs average prices over time to help reduce price fluctuations. This averaging minimizes random price movements, making it easier for traders to see the overall trend and avoid being influenced by short-term volatility.

Trend Identification

SMAs help spot and verify market trends. If the price is above the SMA, it usually points to an upward trend, whereas prices below the SMA indicate a downward trend. This information can be useful for making informed trading decisions based on market direction.

Disadvantages of SMAs

Before Using simple moving averages (SMAs), traders should consider several factors. SMAs are useful indicators. They smooth out price data to reveal trends over time. However, they have limitations. The choice of time period and market conditions can impact their effectiveness. SMAs may also lag in responding to price changes. It’s important to know how SMAs work with other indicators and strategies. By considering these factors, traders can improve their analysis and trading results.

Lagging Indicator

Simple Moving Averages (SMAs) rely on historical price data, causing them to respond slowly to changes in the market. This can result in missed trading opportunities, especially in rapidly changing markets.

Sensitivity to Time Period

The effectiveness of SMAs can differ greatly based on the selected time frame. Shorter SMAs may generate more signals but can also raise the chances of false signals, whereas longer SMAs offer smoother trends but may respond more slowly.

Market Conditions

SMAs can struggle in unstable or flat markets, which might create mixed signals. Therefore, it's useful to pair SMAs with other indicators for a more accurate analysis.

Find Trends with Moving Averages

Average prices are a fairly easy concept to understand, even for investors new to technical analysis. The 200-day SMA effectively smooths out price data and gives a clearer view of an asset's price trend over an extended period. Traders often use it as a support or resistance level when asset prices struggle to go above or below the level. 

If you’re looking at a shorter-term price trend, you can also consider the exponential MA or an SMA in a shorter time frame. As with any stock market indicator, use the signal with caution and also consider using it in combination with other company- or market-specific factors to help predict price action.

Frequently Asked Questions