Chapter 18The 200-Day Moving Average Strategy
Once you know if the trend (the tide) of the market is upward or downward, you can use that information to your advantage.
The 200-day moving average (200 DMA) uses mathematics to demonstrate the direction of the market. This trend-watching strategy shows you the actual overall trend of the market, removing the daily and/or weekly volatility so that you don't put too much emphasis on one bad trading day or even one down week.
Typically, if the market is above the 200 DMA, we are in a rising market environment. When the market dips below that average, we are in a declining one. By knowing the direction of the market, you can plan to protect yourself from large losses.
How to Calculate the 200-Day Moving Average
The 200-day moving average tells us the trend of the market by looking back over the previous 200 trading days (roughly nine months) and averaging the closing prices of those trading days. You can calculate the 200-day moving average by adding yesterday's closing price to the previous 199 trading days' closing prices. You'll come up with a large number:
You then divide that number by 200 to get the average for yesterday:
Mark that point on a chart, and make another dot that signifies where the market closed yesterday.
Tomorrow, ...
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