Trend following · Beginner
200-day moving average strategy
A single rule: above the 200-day average you only look for longs, below it only for shorts. It keeps you out of most bear-market disasters.
The 200-day moving average is the most watched line in finance. The macro trader Paul Tudor Jones has described it as his metric for whether to stay in or out of an asset. It is not an entry signal on its own: it is a filter that tells you which side of the market to be on.
Why it works
Long-term averages smooth out noise and show the dominant trend. Markets that trade below a falling 200-day average are, by definition, in a long-term downtrend, and most large crashes happen below it.
Because so many funds use the same line, it often acts as support or resistance when price first returns to it.
The rules
Setup
- Plot the 200-period simple moving average on the daily chart (on intraday charts, a 200-period average on 1H or 4H plays the same role).
- Price above a rising average: bullish regime. Price below a falling average: bearish regime.
Entry
- In a bullish regime, take only long setups (pullbacks, breakouts) from your usual strategy.
- Optional entry: buy the first pullback to the 200-day average after a long period above it, on a rejection candle.
Stop loss
- For the filter itself: exit or stop buying when price closes clearly below the average (for example two daily closes or 1× ATR below).
- For individual trades, use the stop of your entry strategy.
Exit and management
- Leave the long regime when price closes below the average and the average flattens or turns down.
Filters that improve it
- Add a buffer (1–2% or 1× ATR) to avoid flip-flopping when price hugs the average.
- The slope matters: a flat 200 average means there is no long-term trend.
Worked example
Illustrative example on the S&P 500: the index is 6% above a rising 200-day average, so only longs are allowed. A pullback reaches the 50-day average and a bullish engulfing forms: that is a valid long. Months later the index closes twice below the 200-day average and the average starts to flatten: the filter switches off longs.
Illustrative numbers, not a recommendation.
Common mistakes
- Using the average as a buy signal by itself in a sideways market: you will be whipsawed many times.
- Expecting it to catch tops and bottoms: it is late by design.
- Ignoring it because a setup "looks great": that is exactly when it saves you.
How to practise it
In Candlemind enable the SMA 200 on 1H or 4H. Before every decision ask: is price above or below it, and is it rising? Only trade in that direction for your next 30 lessons and compare your score.
Pre-trade checklist
- Price above (long) / below (short) the 200 MA
- 200 MA sloping the same way
- Entry from your normal setup, in that direction only
Frequently asked questions
Is the 200-day moving average a buy signal?
Not on its own. It is best used as a filter to decide which direction to trade.
SMA or EMA 200?
The simple average is the one most institutions watch. The EMA reacts faster. Choose one and keep it.