Learning Article : Using the 50-DMA Line as Follow-on Entry Point

A lucrative way to multiply your capital is to use position sizing in your favor. Many a time, position sizing is used as a way to manage risk in long-term investing. Reducing your position size gradually when the market comes under pressure resorts to volatility; it is a classic strategy to safeguard your capital. But when you are in a growth stock whose story you’re convinced in, increasing your invested capital as the stock signals follow-on entry points can result into compounding of profits.

One such key technical signal is the 50-DMA (or 10-WMA) line. It is important to know the following points while using the 10-WMA or 50-DMA as follow-on entry signals:

1. Growth story: Follow-on entry points are meant for quality stocks with an appetite for multifold growth. You should be convinced on the fundamental and business characteristics of the firm along with how it is carving out its growth path through innovations, industry disruptions, or competitive advantage. It is also helpful to confirm whether the Company has been able to deliver sound growth numbers in recent quarter(s).
2. Core entry: The core entry point will always remain a sound base pattern from which the stock breaks out with convincing volume. A legitimate breakout from a well-formed cup-with-handle, saucer-with-handle, double-bottom, or other important chart patterns will hint an entry point in the stock for your core capital.
3. Follow-on entry point: A growth stock with a stellar story will rally after breaking out of a base pattern, but may catch its breath and test its 50-DMA line for a few days or weeks. A mild pullback is sometimes healthy for a multifold rally. That is when you have to look for price action around its 50-DMA to know when it is about to resume. A crossover from the 50-DMA with higher than the previous day’s volume (higher the better) is the time to increase your core capital (depending on your conviction).

Bata India has delivered strong business growth as well as investment returns over the last two to three years. The stock broke out of a cup pattern in November end (shown as the “first breakout” in the annotated chart). The stock progressed well and pulled back a bit after delivering some gains but rebound from its 50-DMA line with strong volume at points (1) and (2) in the chart. Increase your positions at these points to magnify gains.