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200-day line – an important tool in chart technology

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200-day line – an important tool in chart technology

Identify trends with the 200-day line

The 200-day line is primarily used by traders to recognize buy and sell signals – true to the motto „the trend is your friend“. When the current price of a stock or index climbs above the 200-day line, it is an uptrend. The moving average acts as a resistance line in this case. Investors assume that the price will continue to rise, so the stock or index should be purchased at this time to make a profit.

The reverse applies if the current price is below the 200-day line. The development is assessed as a downward trend and the moving average represents the support line. It is assumed that prices will continue to fall – investors should sell accordingly and take their profits.

If the price crosses the 200-day line, it should be interpreted as a trend change and investors should check the buy or sell signal. The trading costs must always be taken into account. Costs of purchases and sales should never eat into profits.

Caution: Since the rule is very well known and used by many traders, false signals can also occur. For example, it can happen that a price is only above the 200-day line for a short time and then falls again. In order to get a better overall picture, other instruments should also be used in the analysis.

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