Knowing when to buy or sell a stock need not be tricky. Doing some simple math to calculate the 200-day moving average of a stock can help investors make better decisions.
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The 200-day moving average calculates the simple average of the closing price of a stock over the most recent 200 trading sessions. The line drawn from those numbers shows the trend of a stock over a long duration. It is not meant for short-term or momentum trading.
A simple trading strategy would be to buy shares that are above their 200-day line and sell them when they dip below. IBD founder William O'Neil considered a drop below the 200-day average a late sell signal. Other sell signals will appear before the 200-day line is violated.
When the stock breaches the moving average in strong volume, that is a better indicator of a downward trend than if it dipped below in low volume. Also, if the dip is a small one, shares could reverse back above their 200-day line.
When holding leading stocks in particular, it may be worthwhile to wait and see if they reverse after a small dip below the 200-day line.
Some shares may actually fall below their 200-day line while building strong bases. Oil drilling company Halliburton (HAL) started building a cup base in April 2022 (1) and broke out on June 8. The stock started weakening right away.
Halliburton made a decisive break of the 200-day moving average in early July (2). By then, the stock had triggered two earlier sell signals: It hit the 7%-8% sell rule and broke below the 50-day average about the same time (3). The stock has not recovered from the break of the 200-day line.
A Nuanced Reading The 200-Day Moving Average
A more attentive investor can put this indicator to even better use.
Sometimes a declining stock may find support along this line. If that happens, look for new bases and buy points. That's exactly what happened with Halliburton's October 2021-January 2022 base.
Biotech Amgen (AMGN) found support along this line twice in 2022: On May 2, shares rose 13% after finding support and again, on June 17, shares surged in strong volume from this support and gained as much as 10%. Amgen appears to be forming a base.
The 200-day line can also be a line of resistance for stocks. A stock's path is never linear and is filled with bases, breakouts and breakdowns. A stock often runs into resistance and finds support along the way as well.
On April 21 and Aug. 16 of 2022, the S&P 500 tested the line and fell both times. The 200-day will be a line of resistance for the broad index when it rebounds.
Market conditions also matter. When the market is in correction, a breakdown below the 200-day line is more likely to result in a further drawdown for even leadership stocks.
This article was originally published Oct. 13, 2022, and has been updated.
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FAQs
When the price comes down to the moving average and then rallies up again, this “bounce” could be used as a buy signal. On the flip side, moving averages can also help investors know when to sell a position. For example, if the stock's price rises to the moving average and bounces, this might be a sell signal.
What is a moving average buy sell strategy? ›
Common Moving Average Strategies:
Crossover Strategy: A popular method where a short-term MA crosses above a long-term MA, indicating a buy signal, or below, indicating a sell signal. This strategy helps traders identify trend reversals and is widely used due to its simplicity and effectiveness.
What does moving average tell you in trading? ›
Moving averages are calculated to identify the trend direction of a stock or to determine its support and resistance levels. It is a trend-following or lagging indicator because it is based on past prices. The longer the period for the moving average, the greater the lag.
What is the most successful moving average strategy? ›
The most accurate moving average strategy depends on various factors such as the market conditions, the timeframe you're trading, and your risk tolerance. However, one commonly used and relatively reliable strategy is the crossover method, particularly the “golden cross” and “death cross” signals.
What is the best SMA for swing trading? ›
50 period: The 50 moving average is the standard swing-trading moving average and is very popular. Most traders use it to ride trends because it's the ideal compromise between too short and too long term.
Which moving average is best for day trading? ›
5-8-13 Moving Averages
The combination of five, eight, and 13-bar simple moving averages (SMAs) offers a relatively strong fit for day trading strategies. These are Fibonacci-tuned settings that have withstood the test of time, but interpretive skills are required to use the settings appropriately.
What is the golden cross moving average? ›
What is a Golden Cross? A Golden Cross is a basic technical indicator that occurs in the market when a short-term moving average (50-day) of an asset rises above a long-term moving average (200-day). When traders see a Golden Cross occur, they view this chart pattern as indicative of a strong bull market.
What is the best moving average setting for option trading? ›
The 200-day moving average is widely used by professional traders and investors. It can serve as a benchmark when comparing another moving average, such as the 50-day moving average, to it. If the 50-day moving average is above the 200-day moving average, the stock is considered to be in a bullish position.
What are the advantages of moving averages? ›
Advantages of Moving Averages
- Simplifies Price Data: Smoothes out price fluctuations to reveal underlying trends, making it easier to interpret market movements.
- Identifies Trends: Helps traders recognise bullish or bearish trends by observing the direction of the moving average line.
A 9 or 10-day moving average period is the best-moving average for intraday trading. However, 21-day EMA can be also used for day trading but you have to apply another technical indicator in combination with moving averages crossover to know the trend reversal.
Recall that, as a general guideline, when the price is above a moving average, the trend is considered up. So when the price drops below the moving average, it signals a potential reversal based on that MA. A 20-day moving average will provide many more reversal signals than a 100-day moving average.
What is the best time frame for day trading? ›
A 10- or 15-minute chart time frame is for someone who wants to see the major trends and movements throughout the trading day, not each little gyration (like the 1- or 5-minute). If you want to trade on a 15-minute chart, build and test the strategy on a 15-minute chart.
Should you buy above or below the moving average? ›
Recall that, as a general guideline, when the price is above a moving average, the trend is considered up. So when the price drops below the moving average, it signals a potential reversal based on that MA. A 20-day moving average will provide many more reversal signals than a 100-day moving average.
What is the best period for moving average? ›
Common periods used are 100 days, 200 days, and 500 days for long-term investors, and five days, 10 days, 20 days, and 50 days for short-term trades. Most moving averages are variations of the simple moving average (SMA) and the exponential moving average (EMA).
What is the 9 and 21 EMA strategy? ›
The Role of 9 and 21 EMA in Day Trading
The 9 EMA represents the average price over the previous 9 periods, while the 21 EMA calculates the average over the past 21 periods. These particular settings hold value because they excel at identifying short-term price trends and potential reversal points.
What is 5 8 13 EMA strategy? ›
How Does the 5-8-13 EMA Crossover Work? The crossover detects momentum shifts, which can hint at significant price moves in the near term. When the 5-EMA crosses above the 8 and 13 EMAs, it suggests a rising bullish momentum. When the opposite happens, it indicates bearish momentum.
Some shares may actually fall below their 200-day line while building strong bases. Oil drilling company Halliburton (HAL) started building a cup base in April 2022 (1) and broke out on June 8. The stock started weakening right away.