How Can I Trade a 200-day MA?
The 200-day moving average (200-day MA) is an indicator used not only by traders, but also many investors, as it allows them to identify medium and long-term trends. In this article we will discuss the differences between the main types of moving averages, how to trade a 200-day MA, main recommendations and strategies for working with this indicator.
What is a 200-day MA?
A Moving Average (MA) is one of the most important and frequently used indicators of technical analysis. Most traders and investors use it. This indicator is also often used to build other indicators, such as Donchian Channels and Bollinger Bands. Furthermore, this is a rather universal instrument that can be applied to various time frames. However, you need to consider that you need to use it in combination with other indicators as the MA is considered a lagging indicator.
Medium and long-term traders use the 200-day moving average indicator to identify the average price of an asset in a 200-day period. The 200-day Moving Average can be used practically for any instrument, including currency pairs, stocks, stock indices, and commodities.
200-day SMA vs 200-day EMA – pros and cons
The most frequently used moving averages include SMA (Simple Moving Average) and EMA (Exponential Moving Average). A simple moving average is simply an arithmetic average over a chosen time period. It reacts slowly to changes in price action because each data point is only one in a series of data points.
An exponential moving average is a faster moving average that gives more weight to the latest prices, rather than previous prices and changes quicker to adapt to the currency market trend. EMA starts with the SMA data, but adds a multiplier to more recent price data points. EMA calculations reduce the weight of older price data and increase the weight of the most recent price data depending on their “age”.
EMA may work better on faster markets that move within shorter time frames, as it adapts better to the current prices than SMA. During backtesting of moving average systems at the stock market over a long period of time, EMA signals showed better backtesting signals than SMA signals.
Charting platforms use the following formula for calculating the current EMA: EMA = closing price x multiplier + EMA (previous day) x (1-multiplier).
Therefore, slower reaction to the price movement is a drawback of the SMA, while faster reaction is an advantage of the EMA, although in this case a trader becomes more vulnerable to false signals.
How to trade a 200-day MA
The Moving Average indicator has been used by traders for a long time, although its relevance has remained the same. There are many methods of using this indicator, and below, we will discuss the most popular and also most reliable ones.
As a rule, during the periods of low volatility, the price is moving close to the 200-day MA, and in the periods of increased volatility – breaks away from it. Accordingly, when the price is moving over the MA, the instrument is in the bullish trend, under the MA – bearish trend. Thanks to this, traders can determine the long-term trend in the market, which will naturally benefit his/her effective trading.
In the example below, EUR/USD is in a long-term downward trend, and, accordingly, the prices have been fluctuating below MA200 over several months.
MA200 indicator on the EUR/USD chart
Therefore, the MA in this case serves as a downward resistance line, while each surge of the pair upward should be used for opening/adding short positions. Usually, a Stop-Loss is set above the indicator, which is why its drawback is that the price is moving at a certain distance from the indicator, and the potential loss in case a Stop-Loss order is triggered may exceed 200 pips. However, for a long-term trader with a profit goal of double or triple of that, such potential loss does not pose a huge problem.
The next example is the long-term upward trend of the USD/JPY pair.
MA200 indicator on the USD/JPY chart
In this example, which is relevant at the moment, price fluctuations are happening above the MA200, which serves as the upward support line. Accordingly, the movements in its directions should be used either to buy or add to long positions, with a Stop-Loss order set below the moving average. On this example, the price is also moving at a certain distance from the MA, which is why in order to determine a more accurate point of entry to the market, you need to find ‘historical’ potential support and resistance levels on the chart, or use the rollback to the level, which earlier served as resistance.
And, there is another quite interesting example, the USD/CHF pair, with a long period of relatively low volatility.
MA200 indicator on the USD/CHF chart
In this example, we can see that for a long time, the pair consolidated in a relatively narrow range, before registering a breakout upwards and reaching new extremes. Consolidation of the US dollar in the pair with the Swiss franc happened at the same time the USD confidently grew both against euro and Japanese yen (see above). This can be explained by the purchases of franc in other pairs, which “slowed down” the growth of the USD.
On this chart, the price fluctuated either above or below the MA200, with the price clearly bouncing off the upward support line. Therefore, on the one hand, we see how purchases in the area of the MA200 have clearly been a profitable strategy, and on the other hand – frequent close of the price below the moving average reveals the problem of setting a Stop-Loss order and complicates the calculation of potential profit. This confirms the necessity to take into consideration factors, including fundamental ones.
Considering the volatility of the markets, the strategy of buying/selling an instrument on the movements towards the MA200 does not always work, and that is one of the reasons why traders should not fully rely on the indicators of technical analysis, MA in particular, but use them in combination with others, taking into account the factors that could impact the performance of an instrument at a certain point in time.
The 200-day MA trading strategies
Moving averages are generally useful not only for determining the support and resistance zones and the direction of the trend and trading from these zones in the direction of the trend. In addition, traders use the so-called ‘crossovers’ of slower MA by faster MA, which often confirms a trend reversal.
Bullish crossover happens, when a shorter moving average crosses a longer one upwards, in our case the 200-day moving average. It is also known as the golden cross. Bearish crossover happens, when a shorter moving average crosses the 200-day moving average downwards. This phenomenon is known as the death cross.
Best Moving Average for Intraday - Settings & StrategiesThere is also a method of triple crossover, where three moving averages are involved. Once again, the signal is generated when the shortest moving average crosses two longer moving averages. The simple system of triple crossover may include a 50-day, 100-day and 200-day moving averages. Price crossovers can be combined for trading within a largest trend.
Let’s review the latest chart of the Dow Jones Index.
MA200 indicator on the Dow Jones Index chart
Here we can see here a clear crossover of the 50-day MA by 100-day MA and 200-day MA, i.e. the death cross and triple crossover, which clearly confirmed a reversal of a long-term upward trend and development of a downward trend. Therefore, movements towards the 200-day MA are good opportunities for selling at the best price.
Here's another example, this time WTI Crude Oil.
MA200 indicator on the WTI oil chart
In 2020, we could observe a vivid example of confirmation of a downward trend reversal, where two shorter moving averages crossed the 200-day MA from below to above, thereby forming the golden cross and triple crossover, giving the buy signal. However, the signal is lagging, which is why it is better to trade on the rollbacks, preferably to the existing support levels.
In August of the same year, a reversal and formation of a downward trend (death cross) was observed. However, in that case, one needs to take into account that there is a certain shortage in the oil market along with increased global demand for energies, which is why the sale of the ‘black gold’ is associated with rather high risks and the sell signal may turn out to be false.
How to avoid false signals when trading the 200-day MA
Overall, in order to avoid false signals for short-term and long-term trading, traders need to use MA together with other indicators, such as RSI, MACD, etc., i.e. find confirmation of the moment of entering the market in several indicators at once. For example, you can combine a crossover of three Moving Averages together with RSI, i.e. against the background of strong overbought/oversold condition of an instrument, the reversal signal will carry more weight than when RSI is not in the oversold/overbought zone.
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Summary
In conclusion, I’d like to say that despite its popularity and old-school nature, the Moving Average, just like any other indicator, is not the holy grail, and one should not blindly follow any advice for using it, as well as signals it gives. The markets have changed significantly compared to how they were 5, 10, 20 years ago. Back then, they followed the classic models of conduct better; there were clear trading patterns that indicated reversals or trend continuation.
Furthermore, back then financial markets reacted to fundamental factors and news in a more standard manner. Therefore, many classical indicators were more reliable. Now, the traditional factors no longer influence the performance of an instrument, while the reaction to the events/news is either weak or non-existent.
FAQ
What is a 200-day Мoving Average?
The Moving Average (MA) is one of the most important and frequently used indicators for technical analysis of indicators. Most traders and investors use it. The 200-day MA is a moving average that helps identify the average price of an asset over a 200-day period.
200-day MA vs 200 EMA – what are the pros and cons?
A Simple Moving Average is a more lagging indicator compared to the EMA, while using EMA increases the risks of getting false signals.
How do I trade using the 200-day MA?
Traditionally, the 200-day MA is used for trend trading, i.e. when the price is moving above the 200-day MA, rollbacks should be used to buy, while when the price moves below the 200-day MA – to sell.
What trading strategies use the 200-day MA?
The most popular and reliable ones are the golden cross, when the ‘fast’ moving average crosses the 200-day MA from below to above, thereby giving a bullish signal, and the death cross, when the ‘fast’ moving average crosses the 200-day MA from above to below, giving a bearish signal.
Team that worked on the article
Oleg Tkachenko is an economic analyst and risk manager having more than 14 years of experience in working with systemically important banks, investment companies, and analytical platforms. He has been a Traders Union analyst since 2018. His primary specialties are analysis and prediction of price tendencies in the Forex, stock, commodity, and cryptocurrency markets, as well as the development of trading strategies and individual risk management systems. He also analyzes nonstandard investing markets and studies trading psychology.
Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.
Olga has extensive experience in writing and editing articles about the specifics of working in the Forex market, cryptocurrency market, stock exchanges and also in the segment of financial investment in general. This level of expertise allows Olga to create unique and comprehensive articles, describing complex investment mechanisms in a simple and accessible way for traders of any level.
Olga’s motto: Do well and you’ll be well!
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.