200 Day Moving Average Strategy or 200 MA strategy is one of the oldest forex strategy. The moving average indicator is the first indicator that was invented for forex trading. Now it is widely used in crypto, forex, stocks, and gold trading. There are so many moving average strategies. But the most popular one is 200 day moving average strategy. Although it is the oldest one, it has gained popularity over the past decades because of its accuracy level. Traders are still using 200 day moving average strategy and earn a lot of money from the forex market.
In this article, we discuss how to use this strategy. Its other alternative strategies. But first of all, you have to understand what the moving average is. How many types are there of moving average and so on?
What Is the Moving Average?
A moving average or (MA) is a process or you can say it is a calculation of average data and its movement. For this, it takes previous data and analyzes it, calculates it then creates a line of it.
For example, if you choose 50 periods of moving average and your chart time frame is a daytime frame. Then it’s a 50-day moving average.
The line that will be shown in the chart is the average data for the last 50 days. The more data it can take the more precise or perfect output it can give to us. That’s why 200 day moving average is so important.
Why Trades Give So Much Importance To 200 Day Moving Average?
Though moving average is an old indicator. Still, many traders prefer using moving averages. There are so many reasons why they choose 200 day moving average.
There are so many indicators. The number of indicators is increasing day by day. However pro traders use moving average because of its simplicity and high accuracy. It’s easy to use and even a beginner trader can use it. The chart doesn’t get messy while using the moving average.
The reason for the high accuracy of this strategy is data. It gives us the result of pure data. All other indicators may give you false results but why not moving average? Because it only uses chart data which can not be false. Even other indicators are invented directly or indirectly from moving averages. That’s why all professional traders prefer a 200 Day moving average.
Moving Average Types
According to its use and way of trading, the moving average is divided into several groups.
1. Moving Average (MA)
The moving average is an average of previous data. the number of prices within a time period is divided by the number of total periods is called the moving average. For example, if you set a 100-period moving average. It gives you a result of the previous 100 candlesticks data. Its highs and lows. It calculates every candle price movement and its wick movement. Then it gives us a final result.
2. Simple Moving Average (SMA)
A simple moving average or SMA is also the same as a Moving average (MA). In this case when the moving average starts calculating its data of previous candles. It starts the calculation from the last candle to the first one. For example, if you set a 20-period moving average. It will gather data starting from the 50th candle. Then come forward to the first candle and calculate the average. And finally, give us the final result.
3. Exponential Moving Average (EMA)
Exponential moving average is a kind of moving average that works on recent significant data. In moving average it gathers data from the last candle to the first candle. But in exponential moving it gives us the data starting from the first candle to the last candle. That’s why it gives us recent data which is significant. The exponential moving average is more accurate than other moving averages. That’s why it is used widely in the forex world.
4. Day Moving Average (DMA)
The day moving average is nothing but an extended version of the exponential moving average. In exponential moving average. We use any timeframe as we like. And the chart automatically sets the moving average according to our chart time frame. But in DMA. The moving average is set to a specific time frame which is day time period. Whatever time frame you choose. It will show the day time frame moving average results.
5. Weighted Moving Average
In a weighted moving average method, it puts more weight on recent data and less on past data. This is done by multiplying the price of each bar by a weighting factor. Due to its unique calculation, the WMA will track price more closely than the corresponding simple moving average. WMA Moving Average is a very useful setup. Because it gives the possible support and resistance zone. With support and resistance techniques. It becomes a deadly combination.
6. Smoothing Moving Average (SSMA)
A smoothed moving average is an exponential moving average, only applicable to longer time periods. Smoothed moving averages give recent prices equal weighting to historical prices. The calculation does not refer to a fixed time period but takes into account all available data series.
200 Day Moving Average Strategy
200 day moving average strategy is considered one of the most reliable strategy. It works as a strong support and resistance zone.
Here is the strategy you can see in the image whenever the price touches the 200 moving average. It worked like a support and resistance. Here you can use it in two ways. Draw a horizontal line in the support and resistance area. When the 200 moving average is in the same zone of support or resistance and when the price touches that zone. Take a reversal trade.
In another strategy, you don’t need horizontal lines. When the candle touches the 200 period moving average. Take simply a reversal trade. For confirmation make sure that the candle touches and is rejected from 200 MA. The candle must have a wick which tells us the rejection. Or when the price touches the 200 MA and makes a morning star candle in the 200 MA support zone and an evening star in the 200 MA resistance zone then take a reversal trade.
With that strategy money management and risk management are also needed. No strategy is a fully proven plan. You have to follow strictly money management and risk management.
EMA Ribbon Strategy
You can use the moving average strategy in so many ways. Nowadays the most popular strategy for moving averages is the EMA ribbon strategy. You can understand this strategy by its name.
In this strategy, you have to use an exponential moving average. Set 8 moving average. The moving average time period is 20, 25, 30, 35, 40, 45, 50 and 55. This strategy can be used in any timeframe.
You can see clearly in the image when all the moving averages are more likely a ribbon. Many traders use it wrong. I will tell you the perfect way to use it. Many people trade the ribbon as a crossover. But if you back-test this strategy you can see this will give you a low win ratio.
The best way to use ribbon is when the 20-period moving average and 55-period moving average get so far enough to each other. then it retraces the price. You can see in the image. When these two moving average was far from each other. Then the price goes up and recorrects itself. You can use the ribbon strategy in this way.
Moving Average Cross-Over Strategy
For this strategy, you need three EMAs. 50, 100, and 200 period EMA. Using EMA is better than SMA. And it gives more accurate signals. 50, 100 and 200 EMA works as a support and resistance zone. Sometimes prices respect 50 EMA, sometimes 100 EMA, and sometimes 200 EMA. But here we are not going to trade on support and resistance. We going to trade on crossovers.
In the image, the green line is the 50-period moving average, the red is 100, and the blue is the 200-period moving average. The strategy is whenever all three EMAs cross each other. We take reversal trade. In the image, the price is going up. The closest EMA to the price is 50. Then 100 and lastly 200. When 50 and 100 EMA cross the 200 EMA. We take the trade for the downside and vice versa.
Final Words
It doesn’t matter what strategy you are using. If that strategy has a good win ratio plus good money management and risk management then you will be consistent. No trading strategy is 100 percent. So you have to be disciplined. Discipline and mindset are very important in trading. Always use a good risk-reward ratio. Control your emotions.
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