The simple moving average, or SMA, is one of the most common pieces of technical data that investors rely on. In the case of the 200-day SMA, it shows you the stock’s average price over the past 200 trading days. Here’s how it works.
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What Is the 200-Day Moving Average?
The moving average is a measure of stock price changes over time. It’s considered one of the most important indicators for investors who are looking to spot mid- and long-term trends. As the name suggests, it shows you the stock’s average price over a recent range of trading days. For example, the 50-day moving average represents the stock’s average price over the past 50 days of trading.
In the case of the 200-day moving average, it shows the stock’s average closing price over the past 200 trading days. Each day the moving average changes as the formula updates to include the most recent day’s closing price and drop the furthest day’s closing price.
The moving average is represented as a line on the stock’s price chart. Any stock chart that supports technical indicators will have this data. You can enable it as an overlay on the same section of the chart where the stock’s price appears, allowing investors to compare the stock’s current price with its long term trend.
There are two main types of moving average. The simple moving average (SMA) is a literal average of prices over time. Taking the example of a 200-day simple moving average, you would add up the closing price of the stock over the past 200 trading days and then divide by 200. The other version of this data is the exponential moving average. This formula also measures the average closing price of the stock over time, but weights recent closing prices more heavily than past ones. This is intended to capture recent momentum more accurately.
Most investors rely on the simple moving average, and typically use the terms “moving average” and “simple moving average” interchangeably. When someone intends to use the exponential moving average they generally specify it.
How Investors Use the 200-Day Moving Average
The 200-day moving average is one of the most widely-used technical indicators in stock trading. It’s relied on both for its simplicity and its reliability as a strong indicator of future performance. While you can calculate a moving average for any period of time, the 200-day moving average is particularly useful because the time period it represents (approximately 10 months) is generally considered long enough to capture trends yet short enough to represent useful data for current trading.
The moving average tracks up or down based on the stock’s performance. A stock that has begun trading upward will bend the average up with it, and vice versa for a stock trending down. This trend line tends to be relatively smooth, meaning slow to make significant changes because it relies on 200 days of combined data. It’s difficult for any one day to significantly change the line’s curve.
This is one reason why investors tend to rely on the simple moving average rather than the exponential moving average, which weights recent data more heavily and can skew a trend-based analysis.
The effect is to create an oscillating effect with current price data. At any given point, a stock’s current price will fluctuate above and below the 200-day moving average. Often this can create what’s known as a “support” or “resistance” band. When a stock’s price is above the 200-Day SMA, it’s common for the average line to represent a support band. It’s likely that any decline in price will slow down as it approaches the moving average. When a stock’s price is blow the 200-Day SMA, it’s common for the average line to represent a band of resistance. In this case, it’s likely that significant gains will slow down as they approach the moving average.
Key Weakness of the 200-Day SMA
The biggest strength for the 200-day moving average is also its biggest weakness: it’s slow to respond to the market.
Since this average relies on longer-term data, it doesn’t change quickly with recent market trends. In one sense, this is very useful. It allows investors to see long-term trends in their investment and helps them to evaluate a stock’s fundamental value rather than its short-term trading.
However that means the 200-Day SMA can hide real changes in momentum.
The 200-Day SMA is what’s known as a “lagging indicator.” This means that typically, significant changes won’t show up until after they’ve already occurred. For example, say a stock’s price has quickly and durably begun to fall. The 200-Day SMA won’t reflect this for some time because the stock’s average price will be propped up by its past performance.
The result is that most investors tend to use the 200-day moving average in conjunction with data that captures short-term momentum in a stock’s price. For example, short-term moving averages like the 50-Day SMA are a good way to contrast the stock’s recent momentum with the long-term trend reflected by the 200-Day SMA. Other investors like to use Bollinger Bands to compare a stock’s recent volatility against the 200-Day SMA trend line. Both of these short term data sets can help an investor see if recent price changes reflect building momentum that won’t be captured in data that stretches back for months.
Bottom Line
The 200-day moving average shows the average price of a stock or other asset over the past 200 days. It’s a very useful tool of technical analysis for judging a stock’s momentum compared with its current price.
Investment Planning Tips
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