Moving average: SMA, EMA and the 200-day rule

Written by the Tactfolio research teamPublished Data as of 4 min read

A moving average is the average closing price of a stock or fund over the last set number of days. Each day the newest price comes in and the oldest drops out. It smooths out daily noise so the trend is easier to see. The 200-day moving average is one of the most watched. Many traders read a price above it as a sign of an uptrend.

Key points#

  • A simple moving average (SMA) gives every day the same weight.
  • An exponential moving average (EMA) gives recent days more weight, so it reacts faster.
  • A golden cross is when the 50-day average rises above the 200-day. A death cross is the reverse.
  • Moving average rules usually lag at turns. They sell after a fall starts and buy after a rise starts.
  • In backtests, classic moving average rules cut the worst falls but usually returned less than holding the S&P 500.

Simple vs exponential moving average#

The two differ in how they weight the days. Here is a 5-day example with round numbers.

Say a fund closed at $10, $11, $12, $13 and $14 over five days.

  • 5-day SMA = ($10 + $11 + $12 + $13 + $14) ÷ 5 = $60 ÷ 5 = $12

Now the next day it closes at $18. The $10 drops out and $18 comes in.

  • New 5-day SMA = ($11 + $12 + $13 + $14 + $18) ÷ 5 = $68 ÷ 5 = $13.60

An EMA instead moves part of the way toward each new price. For 5 days, it moves one third of the way (2 ÷ (5 + 1)). Starting from $12:

  • New 5-day EMA = $12 + ($18 − $12) × 1/3 = $14

The EMA jumped to $14 while the SMA reached $13.60. Faster reactions catch turns sooner, but they also mean more false alarms.

What is the 200-day moving average?#

The 200-day moving average is the average close over the last 200 trading days, a little under 10 months. Jeremy Siegel wrote about using it to time the stock market in Stocks for the Long Run (first edition 1994).

The 200-day moving average strategy on Tactfolio holds the S&P 500 while it closes above its 200-day average and Treasury bills while it is below. As of September 25, 2026, its hypothetical backtest from mid-2007 returned about 8% a year, against about 11% for the S&P 500. Its worst fall was about 22%, against 55%. It lost 10% in 2011 while the market gained 2%, as prices crossed the average again and again.

Mebane Faber tested a monthly version in A Quantitative Approach to Tactical Asset Allocation (SSRN, 2007). The Faber 10-month moving average checks only at each month end. As of September 25, 2026, its hypothetical backtest since 2007 returned about 8% a year. It cut the S&P 500’s worst fall by more than half. It still lost about 2% in 2010, while the S&P 500 gained 15%.

Moving average crossover: golden cross and death cross#

A moving average crossover is when a faster average crosses a slower one. A widely used pair is the 50-day and 200-day.

  • Golden cross: the 50-day average rises above the 200-day. Traders read it as the start of an uptrend.
  • Death cross: the 50-day falls below the 200-day. Traders read it as the start of a downtrend.

The golden cross strategy holds the S&P 500 after a golden cross and Treasury bills after a death cross. As of September 25, 2026, its hypothetical backtest from mid-2007 returned about 9% a year, against about 11% for the S&P 500. It gained about 2% in 2008, when the S&P 500 lost 37%. But the 2020 crash was over too fast for the averages to cross. It took the whole 34% fall, then bought back late and ended 2020 down about 5%.

Common mistakes#

  • Expecting it to catch tops and bottoms. A moving average lags by design.
  • Checking daily in a sideways market. Prices crossing back and forth cause many small losses, called whipsaws.
  • Tuning the length to the past. A 187-day average that tested best is likely fitting noise.
  • Adding leverage without care. Some rules hold leveraged ETFs above the average. These funds reset daily. Held for longer, their returns can differ a lot from the multiple in their name.

Try it on Tactfolio#

You can open any of the three classics above, read every rule and see each year of its backtest. To test your own version, open the strategy builder and add an If / Else block with a moving average or exponential moving average. You can pick any length, use month-end closes, or add a band, such as price above 1.05 × the average. Strategies on US stocks and ETFs run on daily prices and hold long positions only.

Common questions#

Which moving average is best?#

No length is best for every market. The 200-day and 10-month averages are the most common choices for long-term trends. Shorter averages react faster but whipsaw more.

Is the 200-day moving average a good indicator?#

It is one of the most widely watched trend signals. In backtests on the S&P 500, rules built on it cut the worst falls but usually returned less than buy and hold. In those tests it helped more with risk than with return.

What is the difference between SMA and EMA?#

An SMA weights every day equally. An EMA gives more weight to recent days, so it turns sooner after a price change. Neither is better in every case.

How do moving averages compare with RSI?#

A moving average tracks the direction of the trend. The RSI indicator tracks how lopsided recent gains and losses have been. Our guide to the best indicators for trading compares both, and trend following shows how moving average rules fit into a wider method.

Sources

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