Here’s a Simple Way to Understand the 200 Day Moving Average

If you have been involved in any financial markets, whether actively trading or simply investing, you have likely heard of the infamous 200 day moving average.

This moving average is simply a line on a chart that plots the average price over 200 trading days.

The 200 day moving average provides both traders and investors a clear picture on the overall trend within a market.

Markets that are trading above their 200 day moving average are said to be trending higher while markets trading below their 200 day moving average are said to be trending lower. This moving average is thought to be a key indicator to determine an overall long term trend. The price that coincides with the 200 day moving average is considered a huge support of the price is above average, and resistance when it’s below it.

Although there are various ways a trader can use the 200 day moving average, one of the most common methods is to go long stocks above their 200 day moving average and go short stocks below their 200 day moving average.

For example, stock ABC is trading at $40 per share. The stock’s 200 day moving average is at $38 per share. Since the stock price is above the 200 day moving average, an investor may potentially look for a long entry on a smaller time frame.

On the other hand, if stock ABC is trading at $40 per share and the 200 day moving average is at $42 per share, then the investor may want to look for a short position on a smaller time frame.

The 200 Day Moving Average is Good, But Not Perfect.

Given the large time frame involved, the 200 day moving average may be most useful to longer-term investors. While it may potentially help keep traders on the right side of the prevailing trend, when used alone it will likely yield poor results.