What Is the 200-Day Simple Moving Average and How to Find It

Simple Moving Average (SMA) 200 is a technical trading tool used by traders to know current market price trends. 

SMA 200 is not just a random number selected by traders. Instead, after a lot of research conventional traders have come to a decision that SMA 200 is working perfectly to show long-term trends. Apart from trends, it also helps traders in analyzing support and resistance points when the SMA is trading above the price, then it acts as resistance and when it’s trading below the price acts as support.  

This indicator holds significant importance for conventional traders as it smoothens prices and gives a concrete direction. Many traders globally use SMA 200 to make trading decisions based on support and resistance. 

How the 200-Day SMA Is Calculated

The Formula for SMA
The Simple Moving Average is calculated using a simple formula

SMA = Sum of closing Prices over a period / Number of days in the Period

For 200-day SMA, the period taken into consideration is 200. This implies that you add up the previous 200 closing prices of a stock and divide by 200. 

Step-by-Step Calculation Example

1. Collect the Data: List down the data of the last 200 closing prices of the stock
   • Example: Day 1 = ₹100, Day 2 = ₹102, Day 3 = ₹101, and so on.
2. Sum Up the Prices: Now, add all of these prices
   • Example: Total = ₹20,000 
3. Divide by 200: Now divide the total of the price by 200
   • Example: ₹20,000 ÷ 200 = ₹100

This implies that the 200-Day SMA in the current example is ₹100. 

This value is plotted on the chart using a smooth linear graph that aligns the price and helps showcase the current trend of the price. 

Also, you don’t have to calculate 200 Day SMA on your own, there are tools available in TradeTiger by Sharekhan and TradingView that allow you to access automated SMA (with custom days) for free. 

How to Use SMA-200 in Technical Trading? 

SMA-200 is used by traders in various ways. 

1. Trend confirmation

The price of the stock is trading above 200-SMA, which indicates the price might be in an uptrend. Vice-versa when the price is trading be 200-SMA, it signals a downtrend. 

2. Support and Resistance

200-day SMA acts as support and resistance to the stock price. It acts as a support when below the candles. Further, acts as resistance when above the candles. 

3. Long-Term Investment Decision

Investors take the help of a 200-day SMA to interpret if a stock is in a favorable trend for a long-term view. Stocks that have a history of trading above 200-day SMA are often seen as good bullish stocks. 

4. It acts as a long trend indicator 

SMA 200 helps in knowing the long-term price trends of the stock. It helps in seeing the wider picture in terms of long-term investing by taking into consideration price data from a very long period.

The upward trend is signaled when the stock price remains upside from SMA, whereas the trend is said to be downward the price is the downside of SMA. This makes a key indicator for traders to know whether buying and selling are strong or weak in the stock.

5. Highlighted Role in Technical Analysis
   In Technical analysis, the SMA 200 acts as an ultimate help to support and resistance levels. If the price of the SMA from the above, then SMA acts as support and pushes the price up. This is done because there are orders of algo traders near the price levels of SMA. The Opposite happens when the price reaches the SMA from downwards, then SMA acts as resistance and pushes the price down. 
6. Impacts Traders Psychologically
   SMA holds psychological importance in trading because many traders and investors believe that algo traders must have put their buying and selling orders on SMA price levels and monitor them accordingly. Price reaching SMA levels can create turbulent effects by triggering buying and selling. 

Limitations of the 200-Day SMA

• It lags for real-time analysis
  The 200-day SMA takes into consideration a lot of past data, this implies that it is not easily affected by the recent price changes. By the time the SMA 200 signals a change in the direction of the price trend, there may be new activities that might have taken place in the stock. Which eventually will take more time to reflect. 
• Cannot be trusted alone
  While we can say that SMA 200 is a useful tool, it is not something that can help you with trading alone. It can only be used in conjunction with other trading strategies. Here, we always recommend using demand and supply theory, not considering these conventional tools and patterns, if anything aligns with your trade setup then it’s fine, otherwise using these indicators and tools individually is never advisable as they have no significant results and can trap you easily. 

Different Types of SMA

If you are a trader, you must know that there are various types of simple moving averages based on the period that is taken into consideration. The most popular one is the 50-day SMA, which is popular for identifying medium-term trends that can suit investors and traders best. 

On the other hand, the 200-day SMA is a long-term tool, this can be helpful for long-term investors but for traders who want to capitalize on short-term movements of the stock, it is not useful as such. The overall direction of the stock can be determined with this, but not the recent changes that can happen. Next, we have 20-day SMA, which is a much shorter version of SMA compared to the other two. It reflects the short-term trends and is useful for scalping and intraday traders. However, they do have the tendency of trapping the traders in a volatile market. 

Each type of SMA provides a unique insight and can be used for different purposes, combining them with your technical analysis strategy can help you scale heights in trading. Also, the crossover points of different SMA’s can help in identifying potential reversal points too. 

Conclusion 

To understand the long-term market trends, a 200-day SMA is a good tool as smoothes out long-term price fluctuations. Eventually helping traders and investors to make informed trading decisions. While it is highly regarded by traders for its ability to signal uptrends and downtrends, it does have some limitations. Its lagging nature and inability to provide real-time insights because of a 200-day period is concerning. That is why it shouldn’t be used in conjunction with other tools for enhanced accuracy. In conclusion, it is important to use SMA in conjunction with other trading strategies. 

Frequently Asked Questions