Reasons to keep a 200-MA on all your charts

One of the most useful and most often overlooked indicators for forex trading is the 200-period simple moving average. Here are three reasons to keep one active on your charts while analysing or trading:

1. Trend at a glance. The 200-MA makes the long-term trend obvious at any periodicity, without having to flip back and forth between charts. Even on choppy charts that appear to have no trend, the 200-MA can be checked to see whether it’s higher on the left (downtrend) or right (uptrend). Keeping one open at all times also serves as a gentle reminder to trade with the trend and gives notification when that trend is changing.

2. Market entry signal. Several long-term trading techniques utilize the 200-MA as an entry trigger. In one, when two (50, 200) or three (50, 100, 200) simple moving averages align themselves from lowest periodicity to the highest, with the 200-MA on bottom, it serves as a long entry signal. When they align from highest to lowest, with the 200-MA on top, it signals a short.

Another, even more simplistic trading technique holds that, as long as the price is above the 200-MA, the trade direction is long. When it’s beneath the 200-MA, the trade direction is short. When the price crosses above or below the 200-MA, the trend has “officially” changed and it’s time to enter a long-term trade in the new, opposite direction.

Below is an example of this trading technique in action. This is the daily chart of USD/CHF dating from January of last year. Using this very simple technique, a short trade would be entered in early July 2007 at 1.2310 and exited in early August 2008 at 1.0494, for a gain of over 1,800 pips per contract. As another trade in the opposition direction would be entered at the same time the previous trade is exited, this hypothetical trader would also go long at 1.0494 in early August 2008 and as of the current date would be up an additional 1,600 pips per contract.

3. Hidden support and resistance levels. Because of the buy-above and sell-below forex trading technique mentioned above, the 200-MA often serves as an otherwise invisible support or resistance level, one that will be overlooked if the indicator isn’t kept open at all times. As this technique is a favourite amongst the big-money players, it’s not one to be ignored.

Below is the one-hour chart of USD/JPY for the period 13–19 November 2008, with the 200-MA in light pink. Note how the price repeatedly respects the 200-MA as a resistance level, indicating that each time the price threatens to rise above that point, the dollar is sold and the yen is bought, forcing the price lower.

EUR/JPY also tends to respect the 200-MA for support and resistance. Below is the one-hour chart over the same time period:

On both yen charts, the price is consolidating within flag formations, with a series of progressively higher lows and lower highs tightening the price into an increasingly narrow triangular channel, reinforced by the 200-MA on the top. If the trend holds, the potential is for a break to the downside.