If you have ever read a market report that said a share “broke below its 200-day moving average”, you have met one of the most watched lines in trading. The 200-day moving average is simple to calculate, easy to read and used by everyone from long-term investors to short-term traders as a guide to the bigger trend.
What it is
A moving average smooths out daily price swings by averaging prices over a set period. The 200-day moving average takes the closing prices of the last 200 trading days, roughly ten months, adds them up and divides by 200. Each day, the newest price is added and the oldest dropped, so the average “moves” along with the market.
There are two main versions. The simple moving average gives every day equal weight. The exponential moving average gives more weight to recent prices, so it reacts faster. Both are widely used. Our guide to moving averages covers the basics.
Why traders watch it
The 200-day average is a long-term trend filter. As a rough rule:
- When the price is above a rising 200-day average, the long-term trend is up.
- When the price is below a falling 200-day average, the long-term trend is down.
Because so many traders and funds watch the same line, it can become self-fulfilling. Buyers often step in when a rising market pulls back to its 200-day average, and sellers may appear when a falling market rallies up to it.
What a break means
When a share falls below its 200-day average after a long period above it, traders take notice. It can signal that a long uptrend is losing strength. This week, one high-flying memory chip stock closed below its 200-day exponential average for the first time in years despite record results, a sign of how the mood around chips has shifted. Our Morning Market Brief covers the wider sell-off.
A break above the 200-day average after a long decline can likewise suggest that a recovery is gaining traction.
The golden cross and death cross
Traders also compare the 200-day average with a shorter one, usually the 50-day. When the 50-day crosses above the 200-day, it is called a golden cross, often seen as bullish. When it crosses below, it is a death cross. Our guide to the golden cross and death cross explains these signals.
Limitations
The 200-day average is slow. By design it lags the market, so it will not catch turning points early. In choppy, sideways markets, price can cross it repeatedly, giving false signals. It works best as a guide to context rather than as a standalone trigger to buy or sell.
How to use it sensibly
Use the 200-day average to decide which way the big tide is flowing, then use shorter-term tools and risk management to plan trades. Many traders prefer to trade in the direction of the 200-day trend and become more cautious when trading against it.
If you would like to see how well you combine technical tools with discipline, take the free Samuel & Co Trading Trader Assessment.
