Moving Average is a very important technical indicator in technical analysis and is used frequently on technical charts for trading strategies on all time frames and by all types of traders – day traders , swing traders and positional traders , trading moving averages involve different types of strategies , crossover strategies using the movement of shorter period moving averages above larger period moving averages , using the slope of moving average to determine the market trends and the location of candlesticks with reference to the moving averages that is above or below the moving average to determine the market trend.
In the previous article we have already discussed the golden cross of moving averages to determine the market trend and using it in your trading strategy , in golden crossover we have already discussed the 200 period moving but it has more importance in trading stocks than just a basic crossover startegy.
The 200 day moving average , be it SMA , DMA or EMA has immense importance in a way that is suggests a general market trend and thus helps a trader determine the bullish or bearish trend , if the stock or index is above the 200 day moving average the market is generally considered bullish and if the stock or index is below the 200 day moving average then it is concidered to be in a bearish trend or downtrend.
If the market rises above the 200 day moving average-
When the stock rises above the 200 day moving average it is an indication of a good bullish trend and you should look for opportunities to buy , shorting should be always avoided because you will be trading against the trend by shorting in such bullish trend.
Above is the chart of Mahindra and Mahindra on NSE where we can see the stock starts forming higher highs and higher lows and is above the 200 moving average indicating that the stock has now officially solidified it’s bullish trend and now you must find an entry point on the technical chart , we have discussed in previous articles that there is no better entry point than an area of value on technical chart and above we can find the trendline indicated in green color was a great area of value to trade from , we can see that you can’t just buy because the market or stock is above the 200 MA you have to find an area of value to trade from.
If the market falls below the 200 day Moving Average –
When the market falls below the 200 day moving average it is a clear indication that the market trend is now bearish and one should look for opportunities to short sell only , buying or making long positions should be avoided .
Above we can see the technical chart of Bharat Forge on NSE , the stock is consistently below the 200 day moving average and is forming lower highs and lower lows clearly corroborating that the market trend is bearish , so you may look for opportunity to short sell this at the area of value , here also the area of value most suited is the trendline hence one may look for candlestick confirmation at the trendline for taking entry into the trade.
An important thing to note here is that you can’t just buy or sell if the stocks move above or below the 200 day moving average , you will have to look for a good entry point at support resistance , trendlines or any other area of value to find the perfect stock trading setup.