The 200-day moving average may be the father of moving averages.
In simple terms, trading above it is healthy; below it, anemic.
The 200-day moving average measures the sentiment of the market on a longer-term basis. I use it on all my charts proudly, because it’s a no-brainer.
Not only am I always interested in a coin price movement in relation to the 200-day moving average – I also study the slope, the distance it is from price action, and its correlation to some other moving averages, particularly the 20 and 50-day.
For instance, where the 50, in particular, is in relation to the 200-day moving average determines the phase of the overall market.
Longer moving averages like the 200 lag tend not to predict price direction, but rather reflect current direction.
Therefore, when you hear “the trend is your friend,” technically put, it really means that the price over the last 200 days is indicating an upward trend.
Therefore, look for buy opportunities when the price is high and when the price is below the last 200 days, look for sell opportunities.
Furthermore, if the price of an instrument is far above or below the 200-day moving average, the reverse happens: a price way above could signal an overbought condition and way below – oversold.
Moving averages are also good indicators of support and resistance.
Since so many traders and investors watch the 200-day, once a price point reaches, falls, or holds it, the collective psychology creates an immediate impact.
Over the longer term, even psychology won’t sustain the price action, but for a short-term play, it works out amazingly well.
Here are the 3 methods I use the 200-day moving average to trade:
1. Trend – Where is the price in relation to the moving average: below, above or touching it?
2. Slope – Turned up, down or neutral (no slope at all)?
3. Crossover – The relation of the shorter-term moving averages (preferably the 50) to the 200 – have they crossed over, under, touching?
When one considers the trend, slope, and relationship the 200-day moving average has to price and shorter-term moving averages – whether you are a day, mini, or swing trader – employ it as a compass for your trading.
More coins to your wallet!