200-Day SMA: Why Use a Simple Moving Average?
The widely-followed 200-day simple moving average (SMA) is considered by many market speculators to be a key barometer of long-term trend strength. Most commonly used on daily charts, the 200-day SMA smooths out price action and helps traders focus on the current price in relation to an average price over time.
What is the 200-Day Simple Moving Average?
The 200-day SMA is a security’s average closing price over the last 200 trading days. It is a benchmark indicator commonly referenced in the world of technical analysis. The formula below is used to calculate a 200-day simple moving average.
Since a new value is added with each new day’s closing price, the value of the 200-day SMA changes daily.
Why is the 200-Day SMA Significant?
Used by many traders and market analysts, the 200-day simple moving average is considered to be the dividing line between a bullish and bearish security. Used predominantly to monitor long-term trends, the 200-day SMA helps traders measure the long-term health of a market.
In other words, the 200-day SMA is important simply because of its popularity. Many traders will be sure to include the 200-day SMA in their market analysis solely on the fact that many other traders are also referencing the same indicator.
How is the 200-Day SMA Used?
While each individual trader may use the 200-day SMA in a unique way, below are a few of the most common applications of the 200-day SMA.
- Support/Resistance Level: The 200-day SMA is often perceived as a level of support or resistance by technical traders. In the chart below, the 200-day SMA acted as support 3 times for E-mini S&P 500 futures (ES).
- Measure of Trend Strength: The slope of a 200-day SMA can help traders gauge the strength of a trend. Below the steep decline of the 200-day SMA on a Crude Oil futures (CL) chart indicates a strong downtrend.
- Price Crossover: When the price crosses up above or down below the 200-day SMA, this is perceived by many traders as a significant move. In the chart below, when the price of E-mini Nasdaq 100 futures (NQ) crosses above the 200-day SMA, this could be interpreted as a bullish signal.
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