If you are looking for an easy forex trading strategy, then the 200 moving average strategy is certainly worth consideration. Moving averages are perhaps the most popular of all technical indicators and used by many professional forex traders. When so many traders follow an indicator, they can have a self-fulfilling prophecy.
The 200-day moving average is one of the most prominent moving averages for measuring the long-term trend. It can be used standalone or as part of a more comprehensive trading strategy. I will cover what it is, how it works and a few strategies that you can consider.
What is the 200-day moving average?
To keep things simple, the 200-day moving average (200MA) is a forex indicator that is used to spot currency pair trends. If price crosses above the 200MA, this is considered an uptrend. If price crosses below the 200MA, then this is considered a downtrend. When a currency pair price crosses its 200-day moving average, it is a technical signal that a reversal has occurred.
The old saying goes, “the trend is your friend”. This means that you can gain an edge by trading with the trend. After all, you wouldn’t want to trade against the tide and get wiped out by strong trends.
However, I don’t think it is a wise idea to use the 200MA on its own. Instead, I would simply use it to decide if I should be looking for long (buy) or short (sell) trades with my existing trading strategy.
The death cross and golden cross are two well-known strategies for trading with the 200-day moving average. You can also use any other technical indicator to find buy signals above the 200MA and sell signals below the 200SMA.
What is the death cross?
The death cross strategy is a chart pattern that indicates the transition from a bull market to a bear market. A death cross means that a short-period moving average, usually the 50-day MA, crosses below a long-period moving average, usually a 200-day MA.
What is the golden cross?
The golden cross strategy is the opposite of the death cross. It is when the 50-day MA crosses above the 200-day MA. This signifies a possible turn to the upside where traders may start looking for long trades and close out any short positions.
How to trade the 200 moving average strategy
There are so many ways that you can trade with the 200-day SMA. You could just load it onto your chart to buy when price is above it and sell when price is below it. However, this would be a bad idea as you need to time your entry. Otherwise, you could end up buying at the top of an uptrend or selling at the bottom of a downtrend.
Therefore, I would use an oscillator to identify overbought or oversold market conditions to time my entry on a pullback into the trend shown by the 200-day moving average. There are many options to choose from with some of the most popular being the RSI and CCI indicators.
I like the stochastic crossover strategy combined with the 200 moving average. This is because it can help to find pullbacks and determine the momentum of the trend. You do not necessarily need for the stochastic crossover to occur in an extreme zone as you may miss some good entries.
Buy signal
In the EUR/USD 1-hour chart below, you can see that the price is above the 200 moving average and the 50MA is above the 200MA. These are both indications that we are in an uptrend. The stochastic indicator crossover below the oversold level of 20, presented an opportunity to enter the trend on a pullback. This was further confirmed by the formation of a spinning top candlestick pattern. You can see that when price did continue in an upwards direction, it made a significant leap once it broke through that recent resistance level.
An aggressive stop loss on this particular trade could have been below the 50-day moving average. A more conservative stop loss could have been around the 200-day moving average which was around 60 pips. For the exit, we could have waited for price to cross back below the 50SMA or reach a take profit target that is at least 2 to 3 times the stop loss to give a favourable risk to reward ratio.
Sell signal
In this EUR/USD 1-hour chart, you will see that the price is below both the blue 50MA and red 200MA. The 50MA has also crossed the 200MA which gives as a strong bearish market signal. To time the entry, we again use a crossover of the stochastic oscillator which confirms the downwards momentum. There are multiple candlestick patterns and price action showing uncertainty in the market whereas price has formed a decent level of support and resistance. A breach of the support shows price shoot downwards to confirm this would have been a good setup to take.
Again, the 50MA or 200MA would’ve been a good place to put the stop loss. In fact, we could have moved the stop loss down with the moving averages to lock some pips in and protect the trade against a market reversal. If we stayed in this position until price crossed above the 50MA, it would have banked over 350+ pips with a stop loss of around 30 pips. This presented an excellent risk to reward ratio of around 1:11!
200 moving average strategy Pros & Cons
Pros
- Trade with the overall trend
- Can be used with many other indicators
- Can use it on any currency pair or chart timeframe
- The 200MA can be used as a stop loss
Cons
- Requires confirmation with other indicators
- Signals might not be as frequent
- Can be lagging and take time to catch up with the trend
Conclusion: does the 200 moving average strategy work?
Yes, as you can see from the examples above, trading with the 200-day moving average can be part of a powerful strategy. However, it does require further confirmation from other technical indicators whilst you should always be aware of any economic events via fundamental analysis.
Not to mention, it is very important to ensure you are using sensible money management that aligns with your own goals. I like to cut losing trades short and let winners run. I would want to lock good trades in at break even point and trail the stop loss to maximise the potential of each move.
If you like what you see and want to give the 200MA strategy a try, you can always open a free demo account with a forex broker if you haven’t already got one. This can be a great way to practice your trading strategies and gain some confidence.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
