200 Day Moving Average

First off, I’d like to explain what the 200 day moving average is. The 200 day moving average is the average of the price of the stock for the last 200 days. It has been proven in the past that the 200 day moving average is a key support and resistance area. Here’s an excerpt from my blog post on what support and resistance is.

“Supports are the lows of the market. Supports are where the demand side (buys) are strong enough that they stop the price from going any further down. As a result, prices go back up. Sometimes, the support level can be predicted from past resistance levels and support levels. Resistance is the opposite of support. Resistances are where the supply side (sell) are strong enough that they prevent the market from going up any further, thus causing the price to come back down. Resistance levels can often times be predicted by looking at the past support and resistance spots.”

For more about support and resistance, please click here.

The 200 day moving average is a key support or resistance level. In a downtrend (when the prices are moving down), the 200 day moving average becomes a big resistance level. That means in a downtrend, if the price tries to break above the 200 day moving average (which becomes a resistance level), the price most likely will not allow the price to break through the barrier.

The opposite can be said during an uptrend. In an uptrend (prices are moving up), the 200 day moving average becomes a big support level. That means in an uptrend, if the price tries to break below the 200 day moving average (which has become a support level), the price most likely won’t fall below the barrier.

Now the 200 day moving average is a part of the study of technical analysis. This indicator has been time proven to work. If you want proof, click here. But the question is, why does it work?

According to Technical Analysts.

According to followers of technical analysis, the 200 day moving average reflects investor psychology. If the price tries to break above the 200 day moving average when it’s in a downtrend, this implies that the price is trying to form an uptrend (changing of trends). Naturally, a bearish market will disagree, and the price will fail to break through the 200 day moving average (which has become a resistance barrier).

If the price tries to break above the 200 day moving average when it’s in an uptrend, this implies that the price is trying to form a downtrend (changing of trends). A bullish market is in no mood for bullish sentiments, hence the price will fail to break below the 200 day moving average, which has now provided support.

According to Non-believers.

An interesting theory proposed by those who don’t believe in technical analysis is that technical analysis only works because those who believe in it use it (in other words, a self-fulfilling prophecy).

To them, the same can be said about the 200 day moving average support/resistance barrier. In a downtrend, the 200 day moving average becomes a resistance area only because technical analysts sell at this area (thus not allowing the price to break through this barrier). In an uptrend, the 200 day moving average becomes a support area only because technical analysts buy at this area (thus not allowing the price to break through this barrier).

What I Think.

I think the 200 day moving average works because of both. Both of these theories make sense. The 200 day moving average is just another technical indicator that usually works. That’s all I need to know to make money off of the 200 day moving average.

6 thoughts on “200 Day Moving Average”

  1. First of all congrats for your EXCELLENT blog! May I ask what time frame do you use to find out what the 200 day moving average is? I get different prices if I use one day, weekly, monthly charts etc. Also what’s the difference between simple and exponential moving averages? Thanks! And keep up the good work!!!

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