200 day moving average trading strategy

How To Use A Moving Average To Buy Stocks.

The moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period of time, like 10 days, 20 minutes, 30 weeks, or any time period the trader chooses. There are advantages to using a moving average in your trading, as well options on what type of moving average to use. Moving average strategies are also popular and can be tailored to any time frame, suiting both long term investors and short-term traders. (see "The Top Four Technical Indicators Trend Traders Need to Know.")

Why Use a Moving Average.

A moving average can help cut down the amount of "noise" on a price chart. Look at the the direction of the moving average to get a basic idea of which way the price is moving. Angled up and price is moving up (or was recently) overall, angled down and price is moving down overall, moving sideways and the price is likely in a range.

A moving average can also act as support or resistance. In an uptrend a 50-day, 100-day or 200-day moving average may act as a support level, as shown in the figure below. This is because the average acts like a floor (support), so the price bounces up off of it. In a downtrend a moving average may act as resistance; like a ceiling, the price hits it and then starts to drop again.

The price won't always "respect" the moving average in this way. The price may run through it slightly or stop and reverse prior to reaching it.

As a general guideline, if the price is above a moving average the trend is up. If the price is below a moving average the trend is down. Moving averages can have different lengths though (discussed shortly), so one may indicate an uptrend while another indicates a downtrend.

[ Moving averages are a great way to identify areas of support or resistance, but they shouldn't be the only strategy that you use to identify potential trades. If you want to learn how other technical analysis strategies, Investopedia Academy's Technical Analysis Course is an excellent starting point. ]

Types of Moving Averages.

A moving average can be calculated in different ways. A five-day simple moving average (SMA) simply adds up the five most recent daily closing prices and divides it by five to create a new average each day. Each average is connected to the next, creating the singular flowing line.

Another popular type of moving average is the exponential moving average (EMA). The calculation is more complex but basically applies more weighting to the most recent prices. Plot a 50-day SMA and a 50-day EMA on the same chart, and you'll notice the EMA reacts more quickly to price changes than the SMA does, due to the additional weighting on recent price data.

Charting software and trading platforms do the calculations, so no manual math is required to use a MA.

One type of MA isn't better than another. An EMA may work better in a stock or financial market for a time, and at other times an SMA may work better. The time frame chosen for a moving average will also play a significant role in how effective it is (regardless of type).

Common moving average lengths are 10, 20, 50, 100 and 200. These lengths can be applied to any chart time frame (one minute, daily, weekly, etc), depending on the traders trade horizon.

The time frame or length you choose for a moving average, also called the "look back period", can play a big role in how effective it is.

An MA with a short time frame will react much quicker to price changes than an MA with a long look back period. In the figure below the 20-day moving average more closely tracks the actual price than the 100-day does.

The 20-day may be of analytical benefit to a shorter-term trader since it follows the price more closely, and therefore produces less "lag" than the longer-term moving average.

Lag is the time it takes for a moving average to signal a potential reversal. Recall, as a general guideline, when the price is above a moving average the trend is considered up. So when the price drops below that moving average it signals a potential reversal based on that MA. A 20-day moving average will provide many more "reversal" signals than a 100-day moving average.

A moving average can be any length, 15, 28, 89, etc. Adjusting the moving average so it provides more accurate signals on historical data may help create better future signals.

Trading Strategies - Crossovers.

Crossovers are one of the main moving average strategies. The first type is a price crossover. This was discussed earlier, and is when the price crosses above or below a moving average to signal a potential change in trend.

Another strategy is to apply two moving averages to a chart, one longer and one shorter. When the shorter MA crosses above the longer term MA it's a buy signal as it indicates the trend is shifting up. This is known as a "golden cross."

When the shorter MA crosses below the longer term MA it's a sell signal as it indicates the trend is shifting down. This is known as a "dead/death cross"

Moving averages are calculated based on historical data, and nothing about the calculation is predictive in nature. Therefore results using moving averages can be random--at times the market seems to respect MA support/resistance and trade signals, and other times it shows no respect.

One major problem is that if the price action becomes choppy the price may swing back and forth generating multiple trend reversal/trade signals. When this occurs it's best to step aside or utilize another indicator to help clarify the trend. The same thing can occur with MA crossovers, where the MAs get "tangled" for a period of time triggering multiple (liking losing) trades.

Moving averages work quite well in strong trending conditions, but often poorly in choppy or ranging conditions.

Adjusting the time frame can aid in this temporarily, although at some point these issues are likely to occur regardless of the time frame chosen for the MA(s).

A moving average simplifies price data by smoothing it out and creating one flowing line. This can make isolating trends easier. Exponential moving averages react quicker to price changes than a simple moving average. In some cases this may be good, and in others it may cause false signals. Moving averages with a shorter look back period (20 days, for example) will also respond quicker to price changes than an average with a longer look period (200 days). Moving average crossovers are a popular strategy for both entries and exits. MAs can also highlight areas of potential support or resistance. While this may appear predictive, moving averages are always based on historical data and simply show the average price over a certain time period.

200 Day Moving Average Trading System.

The 200 Day Moving Average is voted as the number one trading indicator by a forex magazine. Personally I find the 200 day moving average as a very reliable and versatile forex indicator as it can perform quite a number of functions at the same time. In this post, I will be sharing with you the various ways you can use the 200 MA and integrate it into your trading system.

I usually plot 200 Exponential Moving Average instead of the Simple Moving Average because I find the EMA to be more dynamic and responsive compared to the SMA. Below are some of the ways you can make use of the 200 EMA.

1) As a Trend Identifier : If you have read my other blog post talking about the moving averages, you will know that they can be used as a trend identifier. All you need is to observe their slope and you will be able to tell the trend of the market.

If you see the 200 EMA sloping upward, you are in an uptrend and if you see the 200 EMA sloping downward, you are in a downtrend.

2) As a Strength Identifier: Even when you are in an uptrend, the trend can be described as quiet or strong. There are basically 2 kinds of trending market.

If you see the gradient of your 200 EMA to be steeped, you are in a trending and volatile market. If you see the gradient of your 200 EMA to be gentle, you are in a trending and quiet market.

3) As a Support or Resistance Level: Out of so many different value of moving averages, the 200 day moving average is the most significant. If you take a look at your trading chart, you will find the market respecting it more than any other EMAs. Therefore it can be used as a strong support and resistance level.

4) As an Entry Signal: Some traders make use of the 200 EMA to place their entry. When the price moves above it, you can then enter your LONG trade. If the price moves below it, you can then enter your SHORT trade.

Similarly, you can also exit your LONG trade when the price moves below it and vice verse.

Now that you know the power of the 200 day moving average and how to use it in your trading, you can start to integrate it into your trading system and make money from it.

Do note that the above strategy is a general strategy that has not been fine tuned. In order for you to trade with it, please fine it tune on a demo account. If you do not know how to fine tune a forex strategy, please read the below.

For those of you who are totally new to forex trading, I will suggest that you read through this blog post that I have written for beginners.

If you are interested to learn how I do my forex technical analysis, you can take a look at the post below.

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Would like to know the differences between exponential, smoothed and liner weighted moving averages. Can you tell me in details. Currently i’m using 200 smoothed MA to tell me the current trends in higher time frame.

The exponential moving averages gives you a more responsive MA as compared to the rest.

How to avoid false signals. maybe with RSI (moving upper than 70 in buys or lower than 30 in sells), stochs or macd?

Ahmadou Diatta says.

The 200 moving average trading strategy seems more effective for me on a 1 hour chart. However, I have one concern :let’s say for instance if the currency is trading below the 200 ema, should we wait for the macd to go below the 0 line to short the currency pair or either way does not matter, whether it’s above or below the zero line. The reason why I am asking is because I was told that macd is more effective when it’s above the zero line (when longing a currency pair) and more effective when it’s below the zero line (when snorting a currency pair).

again and again many thanks for your work.

i have read many articles that says most of the indicators be more accurate and useful in long time frames like h4 and d1, i saw in one of your reply that you use m15 and m5,whats your opinion in these articles ,

When you use indicators on the higher time frame, there are lesser noise due to the slower moving action on those time frames which is why most people says that most indicators are more accurate on the higher time frame. For me, the 15 minutes is still a very good time frame for indicators but 5 minutes will produce a lot of false signal due to the fast movement on that particular time frame.

Mohammed Dawoodi says.

first of all i would like to say thank you very much to share such a useful information, im trading since 3 years and i know alot of trading companies here in dubai, but there is no one to share this much of information for free.

and here you are you giving all of them for free its like online classes, honestly i paid to learn and it is almost the same information, hope the others to appreciate, thanks again.

I am glad that you find the information useful for you.

PLEASE TELL ME ON WHAT TIME FRAME, M5,M15,M30,H1OR H4.

The strategy works on all time frame, the time frame to use depends on the type of trader you are.

What do u mean by type of (trader you are).Some time I feel that now candle is touching 200EMA and will go away but it crosses and goes in one direction, no reversal appears. Plz. advise.

What I mean is whether you are a scalper who enter and exit your position within minutes or day trader who enter and exit your position within the same day or position trader who enter and exit your position in weeks.

As for your question, it does happen as there is nothing 100% in trading. There are time where thing do not go our way and you have to accept it.

The 200 day moving average was used because there used to be aprox 200 trading days in a year.

The number has now increased to something like 255 days a year. Have you done any research to see if using aprox 255 day moving average would work better to take into account seasonality.

I did not do any research on the 255 days moving average. It will be great if you have any information to share with us here.

Most swing traders apply both the 200 & 250 EMA, to their chart. This way if price shoots rapidly up through lets say the 200 level, another resistance can often be met at 250 level. This to be used mainly on 4-Hour, Daily or even Weekly charts. For shorter time frames as well make use of 50 & 60 EMA.

If your sitting on eggshells your most likely trading to big. I save 50% of the money I make & only 1% of my net worth I put on the table.

Almost everyone starts out focusing on a method & fails to understand money manegement.

You can have a trading method that give you an edge but can lose money if you cant trade as if you dont care or understand beta slippage.

HI, I liked your blog. I am a new trader losing money. I would like some help. I would like to have a simple system to use consistently, something that works for you. I read that you use the 15 min 200 EMA to see the trend and then the 5 min chart to enter a trade.

Right now the EUR/USD is moving up. I have a long trade which I took at 1.3800, and I am wondering how high will it go. I have been sitting on egg shells with all the drops in the last 24 hours. Action Forex recommend to sell the EUR/USD at 1.3650, which looks like to me the 15 min 200 EMA, What do you think about that?

If you are interested to find out more about the market analysis, you can take a look at this blog that I have setup especially to talk about my trading analysis.

First of all thank you for sharing your precious knowledge with us. I have a question. I changed moving average to “exponential”, then period to “200”. But there’s also an option to apply EMA to “close”, “open”, “high”, “low”, median price, typical price etc. Which one should I choose?

As for how to change the moving average to exponential, it depends on your platform. There are some platform that gives you the option of SMA or EMA and there are some that just gives you moving average and you can go to the setting to change it to either exponential, weighted or simple.

As for the price, I use the default close setting.

What time frame do you use?

I usually use the 15 minutes chart to look for opportunity and then move down to 5 minutes for entry.

Where can i get this indicator??

It is available on your trading platform. You just have to plot the moving average and then select the period to be 200.

wait for the price to violate 200 ema, then retrace back to 200 ema, look for opportunity to short or long.

Thks for your great input.

I “found” your website only yesterday but I just wanted to let you know that the 200EMA is definately working for me, entering today EUR/DOLLAR 1.4205 (M15). Perfect buy-signal! Thank you very much for your insight and advice.

I can’t find the 200 EMA on meta 4 indicator list. Is it a signal I have to buy?

You do not need to buy the 200 EMA, you just need to go to the moving average indicator and then select 200 period and select exponential.

i have got moving indicator on my list but i cant find 200 period and exponential plz help me find this.

You should look for Moving Average and then change the period to 200.

hey thanks kelvin , i got it ,

i have one more question ,

is this analysing this indicator would be enough for trading , or need to compare with other indicators , if yes plz help me abt those indicators i have just started trading so dont know much abt indicators.

This indicator is just telling you the current trend of the market as well as showing you where is the resistance or support. In order to trade, you may need other indicators like the forex MACD indicator or forex Stochastic indicator for entry.

Pips Taker says.

Price sometimes do whipsaw around the 200 EMA in the 5 min chart causing much losses. When I buy, price closed below 200 EMA. I exited with a loss and entered a sell. Price closed above 200 EMA and I had to exit with another loss and bought again. Price this time went up a few pips and then closed below 200 EMA. I exited again with another loss and this time I’m fearful of selling. Is there any way to prevent such losses? Should I continue to stick to the plan and sell hoping that price will move down and recoup all my losses?

I personally dont trade with the 5 minutes as I myself have this problem as what you have stated above. The reason of this problem is that the 5 minutes chart has too much noise due to the numerous candlestick formed. Therefore I suggest that you trade off the 15 min instead.

Hope you have a good time.

As you said to share our experience about EMA200.

I would like to draw your attention for this MA from 28 till 30 March for EURUSD.

As you can see in this time frame it is really useless tool for trading.

Unfortunaetlly i can’t upload the Pic.

The 200 EMA is a very reliable tool but in trading there is no indicator that work 100% of the time. You can have all the indicator aligned telling you to enter a trade but you can get stopped out and that is trading. What I meant by reliable is that the indicator works most of the time but not everytime.

You have raised a very good question above and thank you for your input. Do keep in touch.

your trading plan is a very good one but want to ask wether the entry will be through pending order or instant execution. and what time frame do use particulary. thanks.

Dr Julius Ssemakula says.

Hullo Kelvin, the 200EMA is more responsive for me. i have a question though, does it mean that i can leave my position open for as long as possible(even days so long as i adjust my S/L) so long as the price is above or below the 200EMA and has not crossed it to signify exit.

If you are leaving your position open, you need to slowly shift your stop loss to breakeven and eventually lock in some profit just in case there is some news event causing the market to spike.

hi. i like sma 200 because is less senzitive and help you to identify strong rezistance. many house brokers use sma 200….what is your opinion sma 200 or ema 200?

what about sma 200?it s more less senzitive and it s very good for suport and rezitence.

It is also okay to use the 200 sma instead of the ema. It is just that I find the ema more responsive to or price movement.

Maybe u can try them out and let us know the result so that everyone here can learn from it.

I agree, the 200EMA is a fantastic moving average, you can catch large moves trading 200 ema brakes on any time frame even 5M.

Thank you for your idea sharing with us. I have one doubt about which time frame is most suitable for 200 day moving average.

The 200 days EMA is suitable for all time frames. You can try plotting this up on all time frames and see the effect of it. I strongly suggest the use of this moving average as it is a very reliable support and resistance.

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Is this technical indicator the ultimate buy sign?

The most widely watched technical indicator continues to work like a charm.

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Over the past 3 1/2 years, the S&P 500 has managed to bounce off of its moving average whenever it has approached or dipped below it.

And now it's working once again. After dipping only slightly below its 200-day moving average in the prior week, the S&P 500 enjoyed four straight winning sessions, and opened very slightly in the green on Wednesday.

"Against the backdrop of rising macro volatility, the oldest technical indicator in the book proved to be the most prescient," Evercore ISI technical analyst Rich Ross wrote to CNBC.

Starting in 2012, the S&P 500 has bounced off of or rebounded from the 200-day moving average several times as the market's rally has pressed on.

The 200-day moving average is a deceptively simple indicator. All it does is compile and average the 200 most recent closes. But because it quiets the day-to-day noise and "smoothes out" recent chart history, some find it to be a very useful device.

Frequently, technical analysts will compare a chart's current level to its 200-day moving average, and use that to gauge underlying "strength."

The bounce off of the 200-day moving average "demonstrated that the major trend of the broader market remains intact," Craig Johnson of Piper Jaffray wrote to CNBC. "Buy the dips."

Indeed, "buy the dips" has become many traders' manta over the past few years.

Perhaps, then, perception has become reality when it comes to the 200-day moving average; bounces off of the "smoothing mechanism" have been so frequent that traders have been conditioned to buy as soon as the S&P dips below it.

Naturally, this has the makings of a strategy that works until it doesn't. And not every technical analyst is enthusiastic about the recent bounce.

"The uptrend is indeed intact, but the momentum has been slowing under the surface," said Ari Wald, technical analyst with Oppenheimer. "The breakdowns at the stock level are beginning to creep higher…. So with this intact uptrend, we just want to be a little bit more selective."

Wald leans toward the two sectors that have been leading this year: health care and consumer discretionary.

How To Use The 200-Day Moving Average For Trend Trading.

February 14, 2011.

Moving averages are very popular among beginning traders and investors. They are simple to use and give very easy indicators to buy/sell a stock. The 200-day moving average is generally the most talked about along with the 50-day moving average.

I have both on my charts at all time and use them mainly for trend trading and confirmation. For me, they are a quick visual check on my market analysis and have been a really great tool for me trading at home.

What Are Moving Averages (MA)?

Simply put they average the price data from a stock or ETF. The 200-day MA will take the last 200 days worth of data and, you guessed it, average it out. The 50-day MA will only take the last 50 days and so on. Pretty simple right?

As the market moves, these average also move. New daily prices and added in and old ones are dropped out - 1 day at a time. Moving averages help smooth price action and filter out the noise. They also form the building blocks for many other technical indicators and overlays, such as Bollinger Bands, MACD and the McClellan Oscillator.

The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).

MA's Experience Market Lag.

Moving averages do not predict price direction, but rather define the current direction with a lag. Moving averages lag because they are based on past prices - which is mainly why the are not a great short term trading indicator.

The longer the moving average, the more the lag it will have in relation to the current market's movement. For example, a 10-day MA will react quickly to market spikes and drops. In contrast, the 50-day MA and the 200-day MA contains a lot of historical prices and therefore will take longer to turn and adjust.

This is why we don't use them for trading entries and exits. Notice the name of this post - TREND TRADING. Moving averages are slow but great at identifying the overall trend and long term direction of the market.

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Use Shorter Time Frames For Short Term Trading.

I said before that I don't use MA for short term trading - but you obviously could if you wanted to. If you want to use short moving averages (5-15 periods) you can get quick trading signals on short-term trends. But as always, be careful to check other indicators and support/resistance levels. Don't rely solely on the MA as you only signal to trade.

Moving Average Trend Signal: Cross.

There are two different ways moving averages can give you a buy or sell signal:

Simple Cross - The stock simple crossed above or below the moving average line you are using.

The direction of the moving average also conveys some important information about prices and the overall market trend. A rising moving average shows that prices are generally increasing. A falling moving average indicates that prices are generally falling.

EMA or SMA?

A big debate that most technical traders have is whether to use an Exponential or Simple Moving Average. I can write down positives and negatives for both, but I'm curious what YOU all like to use and why? Debate this issue by commenting.

About The Author.

Kirk Du Plessis.

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D. C., he’s a Full-time Options Trader and Real Estate Investor.

He’s been interviewed on dozens of investing websites/podcasts and he’s been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.

SMA's are a little more lagging, and for that reason I would use them for longer term plays. EMA's react faster but the problem with faster reactions is you tend to get more fakeouts. Personally I tend to use EMA's over SMA's in my Forex trading, for intraday or swing trades. For stock options,…..well I think I tend to look more at SMA's but it is not so crucial in my case I only trade condors and double calendars, so I dont really spend much time analyzing posible direction.

One thing I have noticed in the several books I have read, about institutional investors, The Way of the Turtle by Curtis Faith, Trend Following by Michael Covel among others,….they tend to use SMA's as part of their systems, more frequently than EMA's, again, maybe the reason is they are dealing with longer term plays. But it is an interesting topic.

Thanks for the comment Henrik! Yes I actually prefer SMA's more often because they don't have the additional skew factor that the EMA's do when a stock prices moves abruptly higher. Sure they might give a slightly different signal but in the end it's still a long term trend follower. Thanks again Henrik!

There's been talk about OUTLAWING of options…or at least outlawing put options!

What are your thoughts on this?

What next? Call options? Why? Not happy.

Well I guess they just want to stop people from speculating on stocks and "theoretically" pushing them lower. But options, people like you and me buying puts/calls does make any difference in the underlying stock…it's crazy.