200 Day Moving Average: How it Works

Traders use various indicators to analyze a stock's health. The 200-day moving average is one indicator that gives an idea of the long-term moving average and helps investors understand the security's trend over a more extended period. The duration of the Moving Average varies depending on the purpose they’re used for by stock traders. This article illustrates the 200 Day Moving Average calculation and its applicability in stock market trading.

200 Day Moving Average

Let us begin by understanding the moving average. A moving average is used to analyze trends and patterns by averaging historical data. In stock markets, the moving average is used as a trading indicator that averages historical prices and can be plotted on technical charts. It provides a visual representation of the historical price movements and helps the trader to interpret the patterns. The following example of a simple 5-day moving average further illustrates the concept.

Suppose the following data corresponds to the closing prices of a security over the last five days.

Date Closing Price
1-Dec-2022 Rs. 100
2-Dec-2022 Rs. 92
3-Dec-2022 Rs. 89
4-Dec-2022 Rs. 105
5-Dec-2022 Rs. 101

You can determine the 5-day moving average by adding all the closing prices over the last five days and dividing it by the number of trading sessions (in this case - 5)

= (100 + 92 + 89 + 105 + 101) / 5 = 97.5

Similarly, a 200 day moving average is calculated by averaging the closing prices of the past 200 instances. Averaging a larger set of historical data can provide a better perspective of the price trend when compared to averaging a smaller dataset.

Additional Read: What is MACD

200-day Moving Average Chart

As you connect the values of 200-day moving averages, you get a continuous line on the price chart. What does it signify? If the prices are constantly trading above the 200-day moving average line, the security is considered to follow an uptrend. Conversely, if the prices are continuously below the 200-day moving average line, the security is said to exhibit a downtrend. The trend mentioned here refers to the long-term trend of the given security.

Stock traders use the 200 day moving average charts for finding the right opportunity to buy or sell an investment. For example, if the stock’s price is trading above the 200-day moving average line, they may look for buying opportunities. Similarly, traders may look for selling possibilities if prices breach this level from above.

Importance of 200 Day Moving Average

Let us understand the key benefits of 200 DMA

  • Fundamentally strong securities - Traders use stock 200 day moving averages to filter out securities that have consistently stayed above the line over a long period. Such securities can have solid fundamentals and might be suitable investments.
  • Support/Resistance Level - Traders often perceive the 200-day moving average level as a strong support or resistance level. These levels can indicate the right time and opportunity to buy or sell an investment. For example, traders can explore selling opportunities as the 200-day moving average line is breached.
  • Strength of the Current Trend - Traders can identify the current trend's strength by analyzing the 200-day moving average line. For example, a steep decline of the 200-day moving average line indicates a strong downtrend.
  • Price Crossover - Instances when security prices cross over the 200-day moving average line, can be perceived as a strong bullish signal. Traders can examine such crossovers and use them with other indicators to identify the most appropriate entry points.

What is DMA in stock market?

DMA in the stock market stands for Day Moving Average. In technical analysis, moving averages can help determine security's entry and exit points. It compares a security's latest price with the moving average prices for a particular period.

The DMA is commonly used to understand the direction of a trend. For example, a 30-day moving average can be used to identify the trend of securities over the last 30-day period. Traders use DMA to gauge the market direction and understand investor sentiments effectively.

Summing up

The 200-day moving average effectively measures a security's performance over the last 200-day period. It explains the long-term trend of the particular security and depicts its price strength. The 200-days moving average can be used in conjugation with other indicators to identify the best-suited entry and exit points. Traders can explore investing in securities by analysing 200 DMA stocks. Securities that consistently stay above the 200-day moving average line with current prices higher than the average line could qualify as good investment options.

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