How To Use The 200 Day Moving Average To Trade Stocks

There is something special about the 200 day moving average. To many analyst and fund manager the 200 MA is the last sign of health in a stock. A stock that is below its 200 day moving average is considered to be an unhealthy stock and many traders and fund managers do not like to buy a stock that is below this moving average. You can read more about how moving averages can be used to gauge the short term, mid term and long term health of stocks by reading What Is The Moving Average And How To Use It To Analyze Stocks.

There is much to learn about the 200 day moving average because this moving average is considered the most important moving average in a stock investors arsenal. Thousands and millions of investors will be watching the 200 MA. Therefore, it will be appropriate for me to devote an article to this powerful 200 day moving average.

A stock that is above its 200 day moving average is considered healthy

Fundamental analysts spend enormous amount of time reading the balance sheet and financial statements of a company to determine whether the stock of the company is healthy or not. While that may yield a desired result, in my opinion, a faster way to determine the health of a stock is to look at whether it is above its 200 day moving average or not.

If the stock is above its 200 day moving average, then the stock is healthy
If the stock is below its 200 day moving average, then the stock is not healthy

You want to only buy and trade stocks that are healthy. Any stock that is below its 200 day moving average, you should stay away.

In the chart above, you can see Facebook's stock above its 200 day moving average most of the time. Although this stock zig zag up and down, a chartist is able to determine the health of this stock by just a glance. The stock is above its 200 MA showed by the yellow line on the chart. You can see how this stock moved slowly up from around 80 to 123.

A stock that is above its rising 200 MA is considered to be in a long term uptrend

A stock that is above its rising 200 MA is a signal that tells us that the stock is in a long term uptrend. As you can see in the chart of Facebook above, the stock is above its rising 200 day moving average. This tells the investor that Facebook is in a long term uptrend. Its as simple as that!

Here is some uncommon knowledge hidden in plain sight of most investors:

When a stock is above its rising 200 day moving average, it is considered to be in a long term uptrend
When a stock has a flat 200 day moving average, it is considered to be in a long term sideways trend
When a stock is below its declining 200 day moving average, it is considered to be in a long term downtrend

In the chart above, you can see how AMZN traded above its rising 200 day moving average most of the time. The stock had a quick dip below the 200 MA in February 2016 but it rose quickly again. AMZN is definitely in a confirmed long term uptrend. When a stock is above its rising 200 MA there are basically 2 ways to make money from this stock:

You buy breakouts
You buy the dips

In the chart above, you can see that AMGN has a flat 200 day moving average. When a stock has a flat 200 MA, it is considered to be in a long term sideways trend. During this time, you should stay away from this stock as they will most likely not move much. The stock will be moving within a trading range and this is very frustrating for trend followers. However, stocks that are in this sideways mode is perfect for traders who trades support and resistance. When a stock is trending sideways, you can:

Trade support and resistance. You buy the stock near support and sell it near resistance or short it at resistance.
You employ oscillators such as stochastics and you can buy the stock when it is oversold and sell or short the stock when it is overbought.

For me I don't like to trade non trending stocks. but there are traders who just love to trade this kind of stocks.

The chart above shows the chart of RIG which is below it declining 200 day moving average. A stock that is below its declining 200 MA is in a long term downtrend. A beginner should stay away from this stock but a seasoned trader can make money by:

Shorting the rallies
Shorting any breakdown

The 200 day moving average can act as a subjective support and resistance

Support is an area where the stock stops dropping and resistance is the area where a stock stops rising. Congestion areas are valid support and resistance areas but the 200 day moving average can sometimes be a subjective psychological support and resistance area that stops a stock from moving further. Its powerful and it works well often enough because too many people are looking at a stock or index's 200 day moving average.

In the chart above you can see how the S&P 500 crashed after the unexpected BREXIT vote in June 2016. The index dropped for two days but then the mighty 200 MA acted as a support and halted the drop. The index found support there and staged one of the biggest bull rally in recent history that surprised many. I wrote a piece titled Why The Stock Market Crashed After BREXIT And Staged One Of The Greatest Bull Run In Recent History. Do take some time to read it if you want to know why markets can swing from one extreme to the other in a short span of time.

In the chart above, you can see how the 200 day moving average acted as a resistance that made it hard for HST to rise further. Everytime the stock touched its 200 MA, the stock dropped. It is only after testing its 200 MA for many times that HST managed to move up above the 200 day moving average.

Since the 200 day moving average can act as a support and resistance area,there are some traders who craft their trading strategies with the aid of the 200 MA. They:

Buy stocks that drop near to the rising 200 MA
Short stocks that rally near to a declining 200 MA

Of course they will supplement this pattern with other indicators like stochastics, MACD, price support analysis, trend analysis and other stuff like Japanese Candlestick patterns. I will write later on the 200 MA Support Trading Strategy so stay tuned.