Of all the technical indicators that traders follow, moving averages are the simplest. Among moving averages the 200 DMA is considered the most important. The closing of an instrument above or below its 200 DMA has major bullish or bearish implications.
Now the point here is simpler, don’t go long in stocks that are trading below their 200 DMA. Most of extraordinary falls have happened in stocks when they were trading below their 200 DMA. You would have avoided major falls in stocks like Satyam, GTL, GTL Infra, Suzlon and many more, had you exited from them when they closed below their 200 DMA.
Yes, sometimes we can find bargain stocks when they are trading below their 200 DMA but it is difficult to identify bargains when they stocks are trading at their lows. The basic and simple rule is: Buy stocks when they are in long term uptrend (price above 200 day MA) and not in downtrend.
(this post contributed by Jitender Yadav, edited by me)