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Learn with ETMarkets: All about day moving averages

If a stock or an index falls below this technical level, it means that a new buyer is willing to pay less than average price for it.

, ET Bureau|
Last Updated: Oct 07, 2016, 08.42 AM IST|Original: Oct 07, 2016, 08.38 AM IST
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To calculate a 15-day moving average, one has to add the closing price of the asset over the past 15 days and divide it by 15.
To calculate a 15-day moving average, one has to add the closing price of the asset over the past 15 days and divide it by 15.
There are several indicators that one can use to gauge the direction of an index or a stock going ahead. One of the keenly-watched indicators is day moving averages (DMAs). Here's what it means.

1. What is Day Moving Average?
It is a key technical indicator used to track trends in a stock or an index over different time frames such as 15, 50, 100 and 200 days. If a stock or an index falls below this technical level, it means that a new buyer is willing to pay less than average price for it.

2. What are the different types of Day Moving Averages?
Moving averages can be mainly classified into two. A simple moving average is the average value of the price of a stock, a commodity or an index over 15, 50, 100 or 200 days. To calculate a 15-day moving average, one has to add the closing price of the asset over the past 15 days and divide it by 15.

Similarly , a 50-day moving average is calculated by adding closing price of the asset over 50 days and then divided by 50, and so on. An exponential moving average differs from simple moving average as it applies more weightage to recent prices.

3. How does it help investors?
It is a signal that helps investors to decide whether to buy or sell a stock. Since there are different sets of days, it can help both a short-term trader and an investor who is in the market from a long-term horizon.

4. Why is 200-DMA tracked the most?
Since it is a long-term aver age, it is considered a major support level for an index or stock. There are roughly 200 trading days in a year after deducting holidays and weekends. “It gives a yearly average. That is why it is tracked the most,“ said Ashu Bagri, AVPtechnical research at SBICAP Securities. If a stock closes below the 200-DMA, it is considered to be in a long-term downtrend.

A stock is said to be in a long term uptrend if it trades above 200-DMA. Usually , technical analysts conclude a trend only if a stock or an index has fallen continuously below the 200-DMA for three to five days.
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