200 Day Moving Average: How it Works

Listen to our Podcast: Grow your wealth and keep it secure.

0:00 / 0:00

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.

DateClosing Price
1-Dec-2022Rs. 100
2-Dec-2022Rs. 92
3-Dec-2022Rs. 89
4-Dec-2022Rs. 105
5-Dec-2022Rs. 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.

Share this article: 

investment-card-icon

Exchange Traded Funds (ETF) - Meaning And How Do They Work?

Trading accounts facilitate market access, enabling buying, selling, and managing of shares for investment growth, trading and diversification.

investment-card-icon

Difference Between Online Trading and Offline Trading

Online vs Offline Trading: Learn how online trading offers convenience, lower fees & real-time information, while offline trading relies on brokers & manual processes.

investment-card-icon

Benefits of Online Trading

Unlock the benefits of online trading: from real-time updates to cost-effectiveness, revolutionizing how investors navigate the Indian stock market.

investment-card-icon

What is Day Trading

Day trading in India: A comprehensive guide to understanding the stock market segments and the importance of a Demat and Trading account.

investment-card-icon

4 Key Benefits of Intraday Trading

Discover the advantages of intraday trading, such as risk mitigation, profit potential in bear markets, leveraging opportunities, and the platform for continuous learning.

investment-card-icon

Momentum Trading

Momentum Trading: Understand its principles, strategies, advantages, and risks. Learn how to ride the waves of stock price movements.

investment-card-icon

Short Covering and Short Squeeze

Understand the concept of short covering and its role in mitigating losses for short sellers. Know how to spot signals, understand short squeezes for trading success.

investment-card-icon

How to Calculate Stop Loss in Intraday Trading?

Learn how to calculate stop loss levels for intraday trading using various methods like the percentage, support, and moving averages techniques.

investment-card-icon

Day Trading for Beginners

Day trading for Beginner: Open a trading account, research stocks & grasp market fundamentals for successful trading. Learn top strategies employed for day trading.

investment-card-icon

What is Range Trading: Definition, Types & Strategies

Gain insights into range trading strategies and techniques for consistent profits. Learn how to navigate market movements and manage risks effectively.

FAQs

Can I open multiple demat accounts?

Answer Field

Yes, you can open multiple demat accounts but only under the below conditions:

  • You can open only one demat account per DP using the same PAN card.
  • You can open multiple demat accounts with different DPs using the same PAN card.

No results found

Our Secure Trading Platforms

Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading

Bajaj Broking App Download

7 Lac+ Users

icon-with-text

4.3 App Rating

icon-with-text

4 Languages

icon-with-text

₹ 3800 Cr MTF Book

icon-with-text