What Is the 200-Day Simple Moving Average? And How Can You Use It?
Active day and swing traders are always seeking reliable tools and indicators to gain an edge in the market.
One of the most popular tools among traders is the 200 day moving average.
The 200 day moving average is one of the most popular technical analysis indicators because it provides valuable insights into long-term trends and potential entry and exit points. This article will show you exactly what the 200 day moving average is, why it’s popular, its pros and cons, and how you can incorporate it into your trading strategy.
What Is the 200-Day Simple Moving Average?
The 200-day simple moving average is the average of a stock’s closing prices over the last 200 days.
This simple mathematical calculation smooths out price data to create a single flowing line which represents the direction of the trend.
Here is a chart of Nvidia (NVDA) with its 200 day-simple moving average:
As you can see, the moving average helps eliminate daily price noise that makes trend analysis difficult.
We call it a moving average because it moves every day.
When a trading day ends, the closing price for that day replaces the oldest closing price in the calculation.
As an example, there were 200 trading days from November 14, 2023 to August 31, 2023.
So the 200-day moving average would be the average of the closing prices in that time span.
The next day, the 200-day moving average would be the average closing prices from November 15, 2022 to September 1, 2023.
The newest day in the moving average knocks off the oldest one.
Note: moving averages can be calculated on all time frames.
The daily moving average is the most popular, though some people use moving averages on time frames ranking from 1-minute charts to years.
What Are Exponential Moving Averages?
An Exponential Moving Average is a special type of moving average which uses a calculation that more heavily weights recent price action.
As you can see on this chart, the 200-day exponential moving average line is closer to the current stock price than the 200-day simple moving average line.
This is vastly more complex than the “simple” moving average you are learning about today.
Why the 200-Day Moving Average is Popular
Widespread Acceptance and Ease of Use
The 200-day moving average is widely used and followed by traders, market analysts, and even financial journalists.
It’s one of the few chart indicators that non-technical analysts can understand.
We even found several CNBC videos where the 200-day moving average was a subject of discussion:
And many of T3 Live's most popular YouTube videos revolve around the 200 day moving average, like this one featuring Sami Abusaad:
Because of its widespread acceptance, some observers believe the 200-day acts as a self-fulfilling prophecy.
The idea is that when a stock crosses the 200-day, it tends to attract attention and provoke trader responses that align with traditional interpretations of this metric.
Benchmark for Long-term Trends
For many traders, the 200-day moving average serves as a valuable barometer for the overall trend. If a stock is trading above its 200-day moving average, the long-term trend is considered bullish.
Here's an uptrend in Amazon (AMZN):
And on the flip side, if a stock is under the 200 day, the long-term trend is considered bearish.
The 200 Day Removes ‘Noise’
The 200-day moving average helps filter out random fluctuations (or noise) in a stock’s price.
By focusing on this longer timeframe, you get a clearer picture of the overall trend, enabling more informed decisions.
Pros of Using the 200-Day Moving Average
The 200-Day Is Easy to Use
This indicator doesn’t require any calculations on your part, and it’s easy to understand.
Every trading platform, including free ones, offers the 200-day moving average as an indicator you can add to a price chart.
It Identifies Long-term Trends
The 200-day moving average offers a high-level view of a stock’s trend, which can be incredibly useful for traders and investors operating on longer time frames.
It Can Give You Support and Resistance Levels
The 200-day moving average can act as a level of support or resistance.
In this case with the MSOS ETF, the 200 day acted as resistance:
Traders will look for opportunities where the stock price bounces off the 200-day as potential entry or exit points.
It Assists With Risk Management
Some traders may use the 200-day moving average to set stop-loss or take-profit levels, integrating it into their broader risk management strategy.
In the MSOS example above, if traders used the 200-day as a take-profit point, they could have avoided some very steep losses.
Cons of Using the 200-Day Moving Average
The 200 Day Is a Lagging Indicator Like All Moving Averages
Like all moving averages, the 200-day is a lagging indicator. By definition it only looks backwards.
This means it can be slow to respond to rapid changes in price, making it less useful for predicting short-term movements.
In the case of a fast-moving stock, it may take 5, 10, or 20 days for the 200 day to respond.
Check out this chart of Carvana (CVNA). As you can see, the stock started rallying way sooner than the 200 day moving average began rising.
It’s Not Foolproof
While powerful, the 200-day moving average is not a holy grail. It should be used in conjunction with other indicators to confirm signals and make more accurate trading decisions.
You can’t just blindly buy or sell a stock because it hit the 200 day.
It Can Give False Signals
The average can sometimes produce "whipsaws," which are false indications of trend changes, leading traders to enter or exit trades at the worst time.
You can see in this Intel (INTC) chart that trades were mislead into thinking that breaks above the 200 day moving average were signs of a trend change. Those signals were false!
How to Use the 200-Day Moving Average in Stock Market Trading
One of the most popular ways to use the 200-day moving average is to confirm a trend. If a stock is trading above the 200-day moving average, it is considered to be in an uptrend, providing a potential buying opportunity. Or at the very least, it can be a sign to avoid shorting.
Entry and Exit Points
When a stock crosses its 200-day moving average, it’s often considered a significant event, signaling potential entry or exit points. A stock crossing above may indicate a buying opportunity, while a stock crossing below may signal a selling opportunity.
Moving Average Crossovers
Some traders use the 200-day moving average alongside shorter moving averages, like the 50-day, to spot crossovers.
A bullish moving average crossover is when the 50-day moving average crosses above the 200-day, signaling near-term momentum. This crossover happens when the 50-day is rising faster than the 200-day.
Here is an example of a moving average crossover using Apple (AAPL).
Conversely, a bearish crossover occurs when the 50-day crosses below the 200-day.
The 200-Day Moving Average for Risk Management
Some traders use the 200-day moving average to place stop-loss orders. For example, a trader with a long position might set a stop-loss order slightly below the 200-day moving average.
Conclusion: The 200-Day Simple Moving Average Is Powerful, But Imperfect
The 200-day moving average is a powerful yet straightforward tool for day and swing traders looking to understand long-term trends.
It’s not perfect, but it remains a cornerstone of technical analysis.
When used in conjunction with other indicators and a solid risk management strategy, it can serve as an invaluable part of any trader’s toolkit.
To Learn More About Moving Averages
If you’d like to get a better understanding of how moving averages can be used to find winning trade ideas, check out Scott Redler’s free eBook “The Ultimate Guide to Moving Averages.”