Learn how to earn money from the
stock market using the 200 moving average or more clearly we can say how to use
200 day moving average to earn money consistently from the stock market. In
today's post, you will discover strategies, tips, and best practices for
maximizing profits with this powerful technical indicator.
Table
of contents:
- Introduction
- What is the 200 day moving average
- How to use the 200 day moving average to identify trend
- How to timing the market while trading with 200 day moving average
- How to set stop-loss to ride the trend
- Advantages of using 200 MA
- Limitations of the 200 MA
- Conclusion
- FAQs
Introduction
200 day moving average (200MA) is
one of the most followed and popular indicators used by the traders and
investors in the stock market. In different financial TV channels, you will
hear the experts are telling that" XYZ share closed above 200 MA, now it's
time to buy." Sometimes you will see that someone gives advice to
sell any stock that gives a closing below 200 MA.
But hearing these experts'
commentaries don't help you to buy or sell stocks not knowing the right time.
Don't worry! In this blog post, we are here to help you how to use 200 MA in
your trading or investing more accurately to make profit consistently.
What
is the 200 Day Moving Average?
Before we go to 200 MA, first we
should know what is moving average. A moving average is a
trading indicator of price data for certain periods. It is plotted as a
line on the price chart. If the data are taken for 5 days, we add the five
days' prices and divide the sum by 5 and this way we can get the 5 day moving
average. If the data are taken for 20 days then we get 20 day moving
average.
The concept of 200 MA is also same,
here we will take 200 days price data to get 200 MA. When we get by adding
200days price data and divide the sum by 200 we get the 200 MA which is a
long-term moving average indicator. Here's how the 200 MA is looking like on a
chart. See below:
We generally take EMA (exponential
moving average) instead of SMA(simple moving average) when we do technical
analysis with moving average. Both are same, only difference is in their calculations. EMA
is more responsive than SMA.
How
to use the 200 Day Moving Average to Identify Trend
Here's a simple concept about how to
use 200 day moving average. The 200 day MA is a long-term price indicator, so
when we want to trade or invest, we should look for long-term trend of the
stock.
The general idea is: if the price is
above the 200 SMA or EMA we should go for buying the security. And if the price
is below the 200 SMA or EMA we should go for selling the security.
Charts showing examples are given below:
Price is above 200 EMA, so we buy
Price is below the 200 EMA so we
sell
Hook: If you are beginners in the
market or entered the market a few years ago remember one simple rule: When you
trade in stocks always look for index to access conception about the trend of
the market. If nifty 50 index is above 200 SMA or EMA, you should look for
buying opportunities in stocks of Indian market. This is a simple 200 day
moving average strategy which if followed will certainly increase your winning
rate of trading or investing and reduce your losses.
Similarly, if you want to trade mid cap
stocks, you should look for mid cap index, if you want to trade different
sectors' stocks, you must look for the relevant sectoral indices and so on.
How to Timing
the Market while Trading with using 200 Day Moving Average
As we have already
understood to identify what is a bullish trend and what is a bearish trend
using 200 day moving average, now it is most important to find out the right
time when we should enter the trade. We can use a few techniques to entering a
trade.
1. Support and
Resistance.
2. Golden cross over
and Death cross over.
3. 200 day moving
average bounce back.
4. Ascending triangle
and Descending triangle.
Support and Resistance
Support is an area of
a price chart where significant buying pressure comes in.
Resistance is an area
of a price chart where significant selling pressure emerges. When the price
closes above 200 day moving average, we will look for buying opportunities at
support level and when the price closes below 200 day moving average, we look
for selling opportunities at resistance.
Below we can see in
charts:
Buy at Support
Golden Cross and Death Cross Strategy
The Golden
Cross occurs when a short-term moving average (e.g.,50 EMA) crosses
above the 200 MA, signaling a bullish trend. It is often seen as a buying
signal.
The Death
Cross happens when the 50 EMA crosses below the 200 EMA,
signaling a bearish trend, indicating a potential sell-off. The perfect
strategy would be to buy after the golden cross and exit or sell after the
death cross on the price chart. If you simply follow this strategy, your profit
potential will increase, chances of losses will be minimized.
See below our practical examples in charts:
Golden cross happens. Time to buy.
200 Day Moving Average Bounce Back
When
the price is above the 200 EMA and the market is in a short term weak trend the
200 EMA can act as a strong support level on the chart.
It is often noticed that when the price falls and approaches to 200 EMA it bounces back after reaching the 200 EMA. Traders and investors try to enter the security at this moment going long, as it offers buying opportunities. It is a golden opportunity when the 200 EMA coincides with support or resistance. Below is an example of 200 EMA bounce back.
Ascending Triangle Breakout and Descending Triangle Breakdown
An ascending triangle
pattern is a bullish chart pattern forms making identical multiple highs at the
same level and creating higher lows consecutively. The series of multiple
resistances make a horizontal line and the consecutive higher lows form an
ascending trending looking like a triangle.
The pattern indicates
a strong bullish sentiments among the buyers. The buyers are buying the
security inspite of touching the resistance many times.
So, if the
market is above 200 day moving average, we can buy above the ascending
triangle breakout. Remember, more larger the time to form an ascending triangle
the breakout will be more powerful.
In case of descending
triangle, we look for sell the market if the price is below the 200 day moving
average. Because, a descending triangle pattern is a bearish chart pattern,
just opposite of the ascending triangle pattern.
If you want to ride
the massive trends in the market then you should keep your stop-loss in
such a way that your trade must have some rooms. You must give a buffer to your
stop loss so that it won't get stopped easily. The best way to trail the stop
loss to using
200 EMA (specifically
in long-term investment)
That means, when we
are going long or buying stocks we will keep our stop losses below the 200 EMA.
Or we can say that we will exit our trades when the price closes below the 200
EMA.
If you do intraday
trading with 200 EMA, in the case of sale trade, you will exit the trade when
the price closes above the 200 EMA.
Hook: If you want to
ride short trend, you can use 20 EMA to keep your stop-loss.
If you want to ride
medium term trend, you can keep your stop-loss using 50 EMA.
Advantages of Using the 200 MA
Simple and Effective:
It’s easy to understand and widely used in
stock trading.
Reliable in Trend
Identification:
The 200 MA accurately shows long-term
trends, helping traders avoid market noise.
Universal Application:
It works in various markets including
stocks, indices, commodities, and crypto currencies.
Risk Management:
The 200 MA can help traders set stop-loss
levels and manage their risk effectively.
Profit
Potential:
Chances of profit are better and
probability of losses may reduce in using 200 EMA as a reliable
indicator.
Limitations of the 200 MA
Since the 200 MA is based on past data, it
may react slowly to sudden market changes.
False Signals in Range Markets:
In a sideways market or range bound market,
the 200 MA can give false buy or sell signals.
Not Ideal for Short-Term
Trading:
Short-term traders might find the 200 MA
too slow for quick decision-making.
Conclusion
The 200 day moving average is a powerful tool for stock market
traders looking to earn profits. By understanding its applications in trend
identification, support/resistance levels, and using strategies like the Golden
Cross and Trend Following, traders can enhance their decision-making process.
However, it’s essential to recognize its limitations,
particularly in high-volatile market or in sideways or range bound markets. For
best results, you can combine the 200 MA with other technical indicators like
RSI, Bollinger Bands etc. and adhere to sound risk management practices.
FAQs
Q1: What does it mean when the Stock Price
is above the 200 Moving Average?
When a stock price is above the 200 MA, it indicates an upward
or bullish trend, meaning the stock is likely to continue increasing in value.
Q2: Can the 200 Moving Average be used for
Day Trading?
While it's possible, the 200 MA is better suited for long-term
trades. Day traders may prefer shorter MAs, like the 50 MA, for quicker
signals.
Q3: How do I Confirm a Buy Signal Using the 200 MA?
Look for a price crossover above the 200 MA combined with other
indicators, like the RSI, for confirmation before entering a buy trade.
Q4: What is the Golden Cross in the 200 MA Strategy?
The Golden Cross occurs when the 50-day MA crosses above the 200
MA, indicating a potential shift to a bullish market.
Q5: Is the 200 MA Effective in a Volatile Market?
The 200 MA may lag during volatile conditions, so it’s advisable
to combine it with momentum indicators for more accurate signals like
RSI.
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
