Our Strength – Index – Prasan Vidya Bala Mandir

For chart technicians, the 200-day line has been one of the most important tools for decades. But the indicator also enables private investors to achieve better performance. If you follow a few rules, you can significantly increase your returns. Originally, the 200-day line was used to smooth out the sometimes violent price fluctuations of shares. In this way, the major trend can be made more visible. Due to the simple calculation, the indicator can also be used by beginners without any problems. In our guide, we show how the 200-day line is calculated and what investors should pay particular attention to with this strategy.

Simple calculation of the 200-day line

In terms of calculation, the 200-day line is certainly one of the simplest indicators. In the simple version, the arithmetic mean of the closing prices is calculated for the past 200 days. Subsequently, the individual average prices in mt4 are connected with each other. The 200-day line thus describes the moving average of the last 200 trading days. It runs behind the prices and is thus one of the trend-following indicators.

Chartists have always paid great attention to these indicators. After all, one of the oldest stock market rules is "The trend is your friend". Long-term investors in particular should not base their strategy on daily buying and selling, but on the consistent use of long trends.

Simple rule for share trading

But how can the 200-day rule be applied in practice? The moving average is used as a resistance line in this strategy. If the price of an index or a share rises above this average, this is considered a clear buy signal. In this case, investors can expect the price to continue rising.

If, on the other hand, the 200-day line is crossed from above downwards, a sell signal is generated. In this case, the indicator represents a support line. It can be assumed that the prices will continue to go down.

The question now arises as to why the moving average should be observed for the last 200 days of all days. One could, for example, also determine a 148-day line. The reason for this is relatively simple: the 200-day line has shown itself to be a particularly valid indicator in back testing.

Danger of false signals

As far as the hit rate is concerned, the values of a 200-day line strategy are not very convincing. This is just 35 percent. This means that about two thirds of the singals are false signals. In these, however, mostly only minor losses are generated. The few good signals more than make up for them. A good example is the signal to exit in time before the financial crisis in 2008.

The many false signals occur because the indicator is often too short. For example, at the beginning of 2002 the DAX rose only briefly above the 200-day line, only to fall back again. When the markets are in a sideways movement, false signals are particularly frequent.

Advantages of the 200-day line:

Strategy is easy to understand and implement.
Only little time required.
Loss limitation is already integrated into the strategy through sell signals.
Can also be implemented with a small capital investment (e.g. with ETFs).
Clear rules keep emotions out of trading.

Disadvantages of the 200-day line:

Large number of false signals, especially in sideways markets.
Due to the use of the moving average over 200 days, the signals are generated with a delay.