DMA and Trading As a trader in stocks, futures and options, I have a glance at the Indian market analysis and reports on world markets.
There was a report which said “NIFTY – the NSE India – Index breaks out of range: Closes above 200 DMA”.
What is a DMA?
What is the significance of the NIFTY closing above 200 DMA?
Does it have any implication on a trader like you and me?
How can a trader put to use this information?
DMA – The Daily Moving Average is a tool used by technical analysts to track the price movements of a security or commodity. It plots average daily settlement prices over a defined period of time, anywhere from a few days to a couple years.
Calculating DMA is very simple.
All moving average calculations depend upon a period, 5 days, 10 days, 12 days, etc., For the example let us take 5 days as the period. We cannot have a moving average until we have 5 days data. Let us say we have the following days data of NIFTY.
|
Date
|
Close
|
Dma
|
|
Date
|
Close
|
Dma
|
|
02-Mar-09
|
2635.05
|
|
|
27-Mar-09
|
3124.55
|
3014.04
|
|
03-Mar-09
|
2581.55
|
|
|
30-Mar-09
|
2988.10
|
3024.86
|
|
04-Mar-09
|
2617.60
|
|
|
31-Mar-09
|
3015.25
|
3040.05
|
|
05-Mar-09
|
2545.50
|
|
|
01-Apr-09
|
3061.50
|
3054.23
|
|
06-Mar-09
|
2597.20
|
2595.38
|
|
02-Apr-09
|
3222.60
|
3082.40
|
|
09-Mar-09
|
2533.95
|
2575.16
|
|
06-Apr-09
|
3260.25
|
3109.54
|
|
12-Mar-09
|
2593.20
|
2577.49
|
|
08-Apr-09
|
3355.50
|
3183.02
|
|
13-Mar-09
|
2705.80
|
2595.13
|
|
09-Apr-09
|
3355.40
|
3251.05
|
|
16-Mar-09
|
2766.25
|
2639.28
|
|
13-Apr-09
|
3390.90
|
3316.93
|
|
17-Mar-09
|
2744.90
|
2668.82
|
|
15-Apr-09
|
3492.90
|
3370.99
|
|
18-Mar-09
|
2774.95
|
2717.02
|
|
16-Apr-09
|
3375.60
|
3394.06
|
|
19-Mar-09
|
2795.75
|
2757.53
|
|
17-Apr-09
|
3381.30
|
3399.22
|
|
20-Mar-09
|
2795.55
|
2775.48
|
|
20-Apr-09
|
3370.70
|
3402.28
|
|
23-Mar-09
|
2934.00
|
2809.03
|
|
21-Apr-09
|
3365.85
|
3397.27
|
|
24-Mar-09
|
2939.30
|
2847.91
|
|
22-Apr-09
|
3323.40
|
3363.37
|
|
25-Mar-09
|
2990.60
|
2891.04
|
|
23-Apr-09
|
3426.05
|
3373.46
|
|
26-Mar-09
|
3081.75
|
2948.24
|
|
24-Apr-09
|
3482.05
|
3393.61
|
Any stock or index that is trading above its 200-DMA is said to be in an uptrend and is being accumulated; 200-DMA is perceived to be the dividing line between whether it is technically healthy or not. Technical analysts, who make stock and index predictions based on price charts, appear to be relieved that Nifty has closed above 200-DMA. The 200-Day Moving Average is between 3,440 and 3,470 for the Nifty depending on method of computation.
This is an indication for traders that the market is entering a bullish trend. All of us know we can never predict the market. We can only come to conclusions based on the indicators. DMA is such an indicator. A wise trader will go long with appropriate stop losses as per his trading plans when the prices close above the 200 DMA.
DMAs give us indications on the market trends. We can watch for the change in trends and decide upon a strategy to buy or sell. When the closing price crosses the DMA and goes above it then it indicates a uptrend. When it crosses the DMA and goes below it then it indicates a downtrend. As stated above one should always have a trading plan with stop losses. A trader cannot simply rely on the DMA and wait. Stop Losses are the only way to manage risk and ensure that your capital is preserved. | 
