Why do people use the 200 day moving average?
The real answer is because a lot of charting software packages the past few decades have set it as a default.
But you also hear guys like Paul Tudor Jones talk about how below a 200 day moving average, you get out. In other words, bad things happen below the 200 day.
For me, I have reasons for doing everything. And while I understand that there are more like 252 trading days in a year, not 200, I still believe that if a stock is below its 200 day simple moving average, it’s probably not in an uptrend.
This is specifically for my personal definition of an intermediate-term timeframe. I like to look out weeks and months, not years, and certainly not hours or days.
200 days is a good number for me. And while it’s not perfect (hint: nothing is) looking at the percentage of stocks above their 200 day has historically given us some great washout signals. [Read more…]