Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today’s discussion will be surrounding the 200 daily moving average and how we can expect to utilise it as traders.
so what is the 200 day moving average?
The 200 day moving average is a technical long term trend indicator used to analyze and identify long term trends. Basically it is a line that represents the average closing price for the last 200 days and can be applied to any pair you choose.
This indicator is widely used by forex traders because it is seen as a solid indication of the long term trend within the forex market. If price is consistently trading above the 200 day moving average, this can be viewed as a bullish or upward trending market.
On the opposite end of the scale markets consistently trading below the 200 day moving average are seen to be in a downtrend or bullish. That’s fairly simple so let’s move on.
The 200 day moving average is calculated by adding up the closing prices for each of the last 200 days and then dividing them by 200. Each individual day creates a new data point. The 200 MA Indicator Connects all the data points for each day which results in a continuous line which we can see displayed here on our charts.
How do we implement the 200 day moving average in our trading strategy?
Using the 200 daily moving average is increasingly popular with traders as it is multifaceted in its application. Firstly let’s look at it as a form of support and resistance and treating it as such.
The 200 day moving average can be used to identify key levels in the Forex market that have previously been respected. It is extremely common for price the bounce of the 200 day moving average and continue in the direction of the existing trend as you can see here it is apparent on multiple charts and occurs frequently over time.
With this in mind we can view the 200 day moving average as a form of dynamic support or resistance.
Here we have a good example of what happens when price approaches the 200 day moving average when the market is in an downward trend. Traders will traditionally look for selling or shorting opportunities as price approaches the 200 MA. This can be a very good way to identify a high probability trade set up and of course we will want to consider other factors before we take our sell position.
As you would imagine the opposite is also true when looking for buying opportunities in an upward trend. We can look to place our stop losses beyond the 200 MA with a sensible risk reward ratio in mind. Of course the market does always surprise us but the 200 Ma is a fairly consistent indicator for possible reversal in favour of the trend.
Next we have MA Crossovers!
Once we have identified a long-term trend we need to assess the strength of it. Obviously if the trend is weakening and showing lack of momentum it could be a sign of reversal and an ideal time to exit our existing trades.
We may use a smaller term moving averages such as the 21, 55 and 100 day moving averages, In order to assess that lack of momentum we discussed and weakening trend. As we see market price crossing our smaller moving averages it is obvious to see that the market price is reversing.
The chart below, shows how the smaller, faster moving averages signal that the uptrend may be about to reverse. The 21 day moving average crosses through the 55 day moving average and continues to cross the 100 and 200 day moving averages to the downside. These are all bearish signals that appear before the 200 day moving average presents a bearish signal. Consider the smaller daily moving averages a early warning to a potentially bigger movement.
Next we look at Using the 200 Day Moving Average as a Trend filter!
We can use the 200 day moving average is a trend filter by looking at the market in relation to it. We can use it to trade only in the direction of the long-term trend and use our other analysis to find potential entries.
As we see here the market is trading above the 200 day moving average for a prolonged period of time.
We know this means the market is trending upwards and therefore, traders should only be looking for buying opportunities in the market. In This example below we make use of the MACD Indicator in conjunction with the 200 day moving average, we know that using just these two indicators is not enough however it does show us buying opportunities when the MACD crosses the zero line and the 200 MA reject the price almost Simultaneously.
The 200 daily moving average can help us identify long-term trends.
We can filter our trades using the 200 MA and look for opportunities within the direction of the trend.
Due to a massive amount of traders using the 200 MA it’s reliability sometimes lies in its psychological influence, as traders are expecting market reversal on contact the amount of pressure from people buying or selling sometimes insures that.
Now please take some time to think about the topics we have discussed today and contemplate what you have learned today, remember Contemplation is the key to learning.