If you are trading in the stock market, you must have heard about the 200-day moving average indicator. The 200-day moving average is one of the most followed indicators in the stock market.
Just tune in to financial news and you will hear stuff like ………
“Bank nifty is trading above the 200-day moving average (200 MA or 200 DMA).”
“………. stock has broken down the important support level of the 200-day moving average.”
“You should nifty future when it crosses above 200 DMA.”
“Nifty has broken below the 200 MA level — Time to sell.”
“We are in the bearish market as the index has broken down the important support level of 200 MA.”
Wait for a second, ask yourself a very simple question: how does it help me as a trader?
The answer is, it doesn’t.
It plays with emotions and there are great chances that it causes you to buy/sell at the wrong time.
But don’t worry, we are going to change it all in today’s post.
In today post, you will discover:
- What is the 200-day moving average?
- How does the 200-day moving average work?
- How to use the 200-day moving average in your trading style to get more winning trades?
- How to better time your entries in stocks using 200 MA?
Let’s decode the 200-day moving average completely.
Moving average is a trading indicator that averages the price data and it appears as a spline in your chart.
For example, we have closing prices of stock A for 5 days i.e. 280,285,292,300,285. The average price for 5 days movement will be (280+285+292+300+285)/5 = 288.4. So, the 5 days moving average is 288.4. Similarly, you can find moving averages for 50 days, 100 days or 200 days.
There are different types of moving averages: simple, exponential, weighted, etc.
Note: In this article, we will only look at simple moving averages.
Now let us understand how to use 200-MA to increase your chances of making a profit.
As 200-MA is the long-term moving averages (average of approx. one-year price movement), this moving average is used to identify the long-term trend identification of a stock. If the stock is trading below 200-MA, then the stock is in a downtrend, and if the stock is moving above the 200-MA, then the stock is said to be in an uptrend.
Now let us understand how to better time your entries when trading with the 200-day moving average indicator.
You must be thinking that using 200-MA, we can identify long term trends of stock but when is the right time to buy or sell a stock?
You can use the following techniques to enter or exit in a stock.
- Support and Resistance
- 200MA bounce
If the stock price is above 200-MA, look for possible support for that stock. When it comes near to such levels, buy that stock. Do the same for stocks that are trading below 200-MA. Another approach is, wait for the stock to bounce away from the 200-MA level. Watching closing stock at such level gives high probability trades to play.
At Pathfinders, we learn many strategies using moving averages for intraday, swing, and positional trade.