The 200-Day Simple Moving Average Strategy

What is a Simple Moving Average?

A Simple Moving Average (SMA) is a technical indicator that calculates the average price of an asset over a specific number of periods. The 200-day SMA takes the closing prices of the last 200 trading days and calculates their arithmetic mean. This creates a smooth line that follows the general trend of the asset's price.

Why 200 Days?

The 200-day timeframe was chosen because it roughly corresponds to a full trading year (approximately 250 days, accounting for weekends and holidays). This period is long enough to filter out short-term volatility and noise while being responsive enough to capture major trend changes. Many institutional investors and traders consider the 200-day SMA as a key support/resistance level.

The Strategy Rules

The 200-SMA strategy is elegantly simple:

• When the price is ABOVE the 200-day SMA: Invest in leveraged ETFs (bullish signal)
• When the price is BELOW the 200-day SMA: Hold cash (bearish signal)

S&P 500 Example

Let's examine how this strategy would have worked with the S&P 500. The chart below shows the S&P 500 price (blue line) relative to its 200-day SMA (orange line). The grey shaded areas indicate periods when the strategy would be invested in leveraged ETFs, while white areas show cash positions. When combined with leveraged ETFs, the strategy aims to amplify returns during bull markets while protecting capital during bear markets. Leveraged ETFs like SPXL (3x S&P 500) provide amplified exposure to market movements, potentially increasing both gains and losses.

Interactive chart showing S&P 500 price movements relative to its 200-day Simple Moving Average. Grey backgrounds indicate periods when the strategy invests in leveraged ETFs, while white areas show cash positions. Green triangles mark buy signals, red triangles mark sell signals.

Strategy Benefits

• Risk Reduction: Avoids major market drawdowns by moving to cash during bear markets
• Discipline: Removes emotional decision-making from investing
• Simplicity: Easy to understand and implement
• Evidence-Based: Supported by extensive academic research

Academic Research

The 200-SMA strategy has been extensively studied. Research shows it can significantly reduce portfolio volatility and drawdowns while maintaining competitive long-term returns. For example, a study covering 1929-2019 found that the strategy reduced maximum drawdowns from 83.4% to 29.6% compared to buy-and-hold.

Academic Research: 200SMA Strategy (SSRN) rigorously analyzes the performance of the 200-day moving average strategy, including its application to leveraged ETFs. The research finds that using the 200SMA as a timing signal can significantly reduce drawdowns and improve risk-adjusted returns compared to buy-and-hold, especially when combined with leverage.

For extensive backtesting and community discussion, see the Bogleheads forum: Leveraged SMA200 Strategy Back-tested 1929 - 2019.

You can also backtest moving average strategies using Portfolio Visualizer and compare historical returns with the Statistical Analysis Tool.

Case Study: Comparative Analysis of 200-day SMA Strategy Performance for the S&P 500

To empirically evaluate the effectiveness of the 200-day SMA strategy, we conducted a comprehensive Monte Carlo simulation study using historical market data spanning from March 1885 to January 4, 2026. This longitudinal analysis employs a parallel backtesting methodology that simulates all possible 10-year investment periods within the dataset, generating 1,001 distinct simulations to capture robust statistical distributions rather than relying on single-point backtest outcomes. This approach provides superior insights into strategy robustness across varying market cycles and economic conditions.

Methodology and Parameters

Our simulation framework incorporates realistic market conditions and transaction constraints. The benchmark asset is the S&P 500 Total Return Index, with leveraged exposure provided through SPXL (3x S&P 500 ETF with 0.91% total expense ratio). Each simulation assumes an initial investment of $10,000 with monthly contributions of $200 to model a typical dollar-cost averaging approach. The 200-day SMA signal is evaluated daily with no buffer, and trades incur a spread of 0.18% and a fixed cost of $1 per transaction. Tax efficiency is modeled with a 19% marginal tax rate and a $1,000 tax-free allowance. These parameters reflect realistic conditions for individual investors in many developed markets.

Comparative Performance Results

The following table presents the comprehensive performance metrics across four strategy configurations, comparing buy-and-hold approaches with 200-day SMA timing across both unleveraged (1x) and 3x leveraged ETF exposures. The buy-and-hold baseline data is sourced from Leveraged-ETFs.com's parallel backtesting tool, which analyzed 1,001 simulations spanning all possible 10-year investment periods from March 1885 through January 2026.

Key Findings

The empirical analysis reveals several noteworthy patterns. First, the implementation of the 200-day SMA strategy demonstrates a substantial improvement in risk-adjusted returns, particularly in leveraged portfolios. The 3x leveraged strategy with SMA timing achieved a median return of 203.10%, significantly outperforming the 123.06% median return of the buy-and-hold approach. This indicates that the timing strategy effectively captures upside potential while mitigating downside risk. It must also be noted that the average return for the 3x SMA strategy (326.95%) was slightly lower than buy-and-hold (369.11%), caused by a few extreme outlier simulations in buy-and-hold that generated massive returns during long-term bull markets through the use of leverage.

However, besides high returns, the most compelling advantage of the 200-day SMA strategy lies in its risk mitigation capabilities. Critically, the SMA strategy substantially mitigates tail risk. The maximum observed drawdown for the 3x SMA strategy was 92.51% compared to 99.86% for buy-and-hold 3x exposure—a 7.35 percentage point reduction in worst-case scenarios. To view this from another angle, the SMA strategy leaves the investor with 53.5 times more capital intact in the worst-case scenario compared to buy-and-hold (7.49% vs. 0.14% of initial capital). The average maximum drawdown improved from 77.03% to 50.71%, demonstrating consistent risk reduction across the distribution.

Run Your Own Analysis

The empirical evidence presented here demonstrates the potential effectiveness of systematic SMA-based strategies. To deepen your understanding and test alternative parameters, we recommend exploring the Leveraged-ETFs.com parallel backtesting tool. This platform allows you to:

• Simulate all possible historical periods within a custom timeframe
• Test different SMA periods and compare their performance (the newsletter service offers custom SMA lengths in the advanced options)
• Backtest with different thresholds (e.g., the SMA has to be x% over/under the underlying index, this can also be customized in the newsletter service in the advanced options)
• Analyze probability distributions rather than single-point backtests
• Adjust parameters such as initial investment, monthly contributions, and leveraged ETF selection
• Evaluate risk metrics including maximum drawdowns and success rates

By conducting your own analysis with different parameters and market periods, you can develop a more comprehensive understanding of how the 200-day SMA strategy might perform under various economic conditions relevant to your investment objectives.