Introduction

The 200-day simple moving average (200-day MA) is one of the most widely followed indicators in technical analysis. It is used to clearly define both long-term trends and key areas of support and resistance. Because of these features, the 200-day MA is an extremely useful tool for swing traders looking to capitalize on short to medium-term price movements.

A moving average smooths out past price data by averaging a security’s closing prices over a set period. The 200-day MA provides a broad snapshot of a stock’s long-term trend direction. As a dynamic indicator, it adjusts and moves along with price action. By remaining above or below the 200-day MA, traders can gauge if a security remains in an overall state of a bullish or bearish trend.

In this article, we will explore some of the main concepts for effectively using the 200-day MA within well-planned, risk-managed swing trading strategies. Key topics include identifying and trading alongside the dominant trend, using the MA dynamically for support/resistance, combining other indicators to refine trade signals, and understanding when the strategy may not apply.

Identifying Trends with the 200-Day MA

When a security’s price is trading above its 200-day moving average, it signals that it is in a long-term uptrend. The rising 200-day MA also shows this upward direction. Traders will want to focus predominantly on long trades and bullish setups in this state.

Conversely, when a security’s price is trading below the 200-day MA, it signals that it is in a long-term downtrend. The downward sloping moving average confirms this bearish bias. Traders will want to key in on shorting opportunities to capitalize on further downside momentum.

Using the 200-Day MA to Set Trade Entry and Exit Points

One of the most basic trade signals with a 200-day MA strategy is to go long when price crosses back above the indicator after being below it. The moving average crossover indicates the long-term trend has potentially flipped from bearish back to bullish. Traders can use this signal to set swing trade entry points in the direction of the new uptrend.

Conversely, traders can look to take profits or exit long positions when price falls back below the 200-day MA after a sustained uptrend. The crossover marks a change in the long-term trend from bullish to bearish. The indicator break signals an opportune time to book profits or set stop losses on existing long positions.

Short trades work in the opposite manner, with the 200-day MA providing insight into opportune times to enter and exit bearish swing positions. When price crosses below after failing to hold above, traders can initiate short sells. When price pushes back above after remaining below, traders can cover short positions and bank profits.

The 200-Day MA as Dynamic Support and Resistance

In addition to gauging trend direction, the 200-day moving average often acts as a support and resistance line. In an uptrend, as the price pulls back to the 200-day MA, buying activity typically increases around the significant moving average level. The rising indicator marks an area where buyers have historically stepped back in.

Traders can use these potential reversal areas around the dynamic 200-day MA to plan entries and place stop losses. By buying on pullbacks to major support as marked by the indicator, traders improve timing and pricing of swing trade entries in an uptrend. Stops can be placed safely below previous lows with room given to not get stopped out prematurely.

The 200-day MA often acts in the inverse manner when providing resistance in a downtrend. As bears push the price lower, counter-trend bounces back up will often stall and reverse around the descending indicator. Traders can use these upper areas to potentially enter short sells within overall bearish trends.

Combining Other Indicators with the 200-Day MA

While the 200-day MA is useful on its own, traders can incorporate other technical analysis tools to better time entry and exit points. Oscillators like the Relative Strength Index (RSI) help gauge overbought and oversold levels to prevent buying at the top or shorting at the bottom. Volume indicators confirm whether institutional traders are supporting breakouts above key moving average levels.

Additionally, pairing the 200-day MA with other complementary moving averages can improve signals. The 50-day MA tracks medium-term trends, while the 20-day tracks short-term trends. Using the trio of MAs together provides both long and short-term trend perspectives. Traders may focus on long trades when all three MAs are rising, for example.

Managing Risk with Stop Losses under 200-Day MA

While trading with the current of longer-term trends, traders still need to actively manage risk on all trades. Strategically placing stop loss orders under areas of technical support protects capital in case of unexpected volatility or a trend reversal.

Using the 200-day MA as a guide for stop placement ensures stops allow for some wiggle room below key support levels. Stop levels must reflect the inherent volatility of the security to minimize premature exit signals before a trend resumes. Tighter stops may suit lower volatility stocks, while wider stops accommodate more volatility.

In an uptrend, trailing stop loss orders below the rising 200-day MA also allow for locking in open profits as the trend pushes higher over the medium-term. Stop levels can trail below previous minor swing low points as well.

When the 200-Day MA Strategy May Not Work

Despite the many benefits of using the 200-day moving average, traders should be aware of some situations when using the indicator has drawbacks: