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What Is the 200-Day Moving Average and How Does It Work

04 Dec 2023

The 200-day moving average is a way for traders and investors to find out about trends in the market. This is important while investing and trading in the stock market and acts as a useful indicator to determine how the overall market is behaving. On a chart, the indicator may appear as a line and can move higher or lower, depending on the patterns of movement of the market in general. Considered more useful as a long-term indicator (200 days), this is often used in trading. 

200-Day Moving Average - The Basics of How It Works

The 200-day moving average is a main indicator that tells traders and investors the average closing price of a stock which is observed over 200 days. There are moving averages that span different periods based on their purpose for traders and investors. These moving averages are indicators of trends and tell stock traders how price patterns occur over 200 days. Since the timeframe of 200 days is considered as long, this average tracks the price behaviour over the long run. 

The 200-Day Moving Average in Charts

Investors and regular stock traders often study charts that inform them of stock price movements over time. These charts are usually in the form of line graphs. Lines on a chart may indicate stock price movement in the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). A variety of variables may affect the 200-day moving average, and lines on a chart may show peaks, dips or flat lines, depending on events or other factors that influence stock price patterns. This is how a 200-day moving average works for stock traders and investors. 

An Illustrative Example

An example of a 200-day moving average can be illustrated by a chart seen during March and May 2020. If you saw the chart a little before March 2020, you would have noticed that prices were rising by incremental margins. By sometime in March, the same chart showed a flattening of the line, and this continued till May 2020. What does this tell us? The effect of the pandemic and the impact of fears like loss of employment, global economies plunging into recession and poor cash flows have clear negative effects on the 200-day moving average. 

What is the importance of the 200-day moving average? 

The 200-day moving average is a long-term moving average. What does it do for stock traders and investors? It helps to find stronger stocks in the market, those that are built on robust technical foundations, and gauges market trends for the long term and fixes stop losses. Here are the uses of the 200-day moving average in a little more detail: 

  • Finding Fundamentally Robust Securities

Traders and investors use the 200-day moving average to indicate which stocks to filter out while investing. Through this indicator, analysts and traders know which stocks are fundamentally strong and which ones don't make the mark. If a stock shows performance above the moving average in a period, the chances are that this may be considered fundamentally healthy, keeping prices high. Furthermore, the number of companies which perform above their moving averages, making up 200 days, indicates the overall financial health of a market and the overall sentiment of traders in that market. 

  • The 200-Day Moving Average for Support and Resistance

The 200-day moving average trend line may give investors and traders main price levels which have not been breached yet. Before breaching the 200-day moving average, prices may normally deflect unless a strong trigger comes into play. Therefore, the 200-day moving average doubles as a reliable level of support and resistance. For instance, if the 200-day moving average trend line moves up, traders may just go long if prices deflect off trend lines that double as support levels. In such a case, a trader may hope that prices could bottom out and then likely rise with the trend going up. 

Now consider this. If the trend line moves up too sharply, investors and traders may take that to mean that a trend reversal is going to occur in the short term. With a sharp downward turn, a bottoming-out of prices may be signalled as well. 

  • Setting Up Stop-Loss

For traders and investors who are into trading strategies to make the most of their trades, the 200-day moving average can help with stop-loss activity. Choosing a 200-day moving average for fixing a stop-loss can be crucial for traders. Selecting too brief duration for a moving average may result in a lost opportunity for traders as the stop-loss gets triggered before stock prices potentially increase or decrease further. 

Using Indicators to Get Returns

One of the more popular indicators of movements in stock prices is the 200-day moving average. If you wish to open a Demat account with the aim of stock trading, or even want to invest in any upcoming IPO, the 200-day moving average is a reliable way to evaluate the behaviour of stock prices for the long run. This is an indicator that tells you whether markets may have had a bull run or a bear run for long periods. 

 

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