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Unlocking the Potential of the 100-Day Moving Average

26 Oct 2023

Introduction

Daily Moving Averages (DMA) are technical indicators of the price movement of an asset class. Such indicators are usually used by technical analysts to identify ongoing price trends and look for any patterns that could suggest future movements and behavior for the asset. This can be long-term (200 DMA), medium-term (100 DMA), or short-term (50 DMA), depending on the requirements of the analyst. Some patterns or trends that can be extrapolated include support and resistance levels, price action, and crossover analysis of the asset. The 100-day moving average (100 DMA) is a vital tool in trading and investing. This article explores its definition, significance, and practical applications.

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Understanding the 100-day Moving Average

The 100 DMA calculates the average closing price of an asset over the past 100 trading days. It smooths price data, making it easier to identify trends. The 100 DMA can be easily calculated and is represented by the formula given below:

100 DMA of Stock X = (CL1 + CL2 + CL3 + ................. + CL100) / 100, where

CL = Closing Price of Day n

n ranges between 1 and 100, inclusive

One of the key uses of the 100 DMA is to identify trends. When the current price of an asset is above the 100 DMA, it suggests an uptrend. Conversely, when the price falls below the 100 DMA, it indicates a downtrend. This simple yet effective analysis allows traders to gauge the overall market sentiment regarding a particular asset.

DMAs also give you a sense of market sentiment. When the prices are above the 100 DMA, the market can be said to be bullish. Whereas if the prices are trading below the DMAs, the market can be said to be bearish. Combining DMAs of different durations can help you identify patterns of trend reversals that the asset has exhibited in the past.

100 DMAs, since they are indicative of medium-term price action, are also used as support and resistance by traders to specify stop losses for their limit orders.

Limitations

While powerful, the 100 DMA isn't foolproof. It's crucial to understand that such indicators are not forward-looking, which means that they indicate the movement of prices in the past, which might not be an absolutely accurate indication of future price movements. Combining it with other tools can be effective in getting more accurate results.

Conclusion

In conclusion, the 100-day moving average is a versatile and valuable indicator in the world of trading and investing. It helps identify trends, acts as support or resistance, and aids in decision-making. However, it's essential to remember that no single indicator guarantees success in trading. A well-rounded approach that incorporates various analysis methods can significantly enhance your trading strategies and is key to achieving consistent profitability.

 

Related Articles:  Real Estate Investment Trust: Meaning and Significance | Modern Portfolio Theory: Meaning and Example | A Complete Guide to Passive Trading

 

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