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.
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