What Moving Averages Are
The plain-English version
A moving average is a smoothed trend line. Instead of looking only at today's price, it averages a recent set of prices so one noisy day does not dominate the decision.
If price is above the moving average, the asset is trading stronger than its recent baseline. If price is below it, the asset is weaker than that baseline.
SMA versus EMA
A simple moving average, or SMA, gives every day in the window equal weight. A 20-day SMA averages the last 20 prices.
An exponential moving average, or EMA, gives more weight to recent prices. A 5-day EMA reacts faster than a 20-day SMA, but it can also flip more often in noisy markets.
Why traders use moving averages
Capture uptrends
A long moving average, such as the 200-day average, helps identify when the broad market trend is constructive enough to hold leveraged long exposure.
Spot reversals
A shorter moving average, such as TQQQ's 20-day average, helps identify when a beaten-down asset has reclaimed short-term strength.
Handle chop
When price keeps crossing back and forth around a moving average, the market is not giving a clean trend. Defensive rules help avoid overreacting to every wiggle.
Key Ideas
- A simple moving average gives equal weight to every day in the lookback window.
- An exponential moving average reacts faster because recent prices carry more weight.
- Long windows like 200 days are slow regime filters; short windows like 5 or 20 days are tactical triggers.
Strategy Walkthrough
How moving averages change the decision
Moving averages are the strategy's trend map. The 200-day average separates broad bull and bear regimes, while the 20-day average helps detect when TQQQ has reclaimed short-term strength inside a bearish backdrop.
TQQQ Core
Early 2022 signal window
Split-adjusted 2:45pm ET prices from the local backtest cache. This view shows TQQQ price, its 20-day moving average, RSI(10), and the strategy signal selected on each sample date.
What to notice
- Below the short-term average, the strategy asks whether RSI is oversold or whether defensive assets are stronger.
- Above the short-term average, a bear-market bounce can become a tradable reclaim. On 03-17, TQQQ moved above its 20-day average and the strategy rotated back to TQQQ.
- Moving averages help avoid treating every small bounce as a new uptrend. The strategy waits for a threshold that smooths out day-to-day noise.
Signal colors
TQQQ
Long Nasdaq growth exposure
SQQQ
Inverse Nasdaq defense
BSV
Short-duration bond defense
UVXY
Volatility fade or hedge
01-24
Oversold rebound
TQQQ RSI fell to 19.9. The strategy treated the selling as stretched enough to look for a rebound even though price was below the 20-day average.
02-11
Defense takes over
RSI was no longer deeply oversold, price was below the 20-day average, and SQQQ had the stronger defensive RSI. The strategy moved to inverse Nasdaq exposure.
02-23
Another reversal attempt
TQQQ RSI reached 28.8. That crossed the oversold rebound rule again, so the strategy rotated back to TQQQ instead of staying defensive.
02-28
Choppy defense
Price had not reclaimed the 20-day average and the defensive RSI comparison was close. The strategy preferred short-duration bond exposure over SQQQ.
03-17
Trend reclaim
TQQQ closed above its 20-day average while the broad market was still below its 200-day average. This is the bear-regime reclaim rule.
Common Uses
Examples
Price above 200MA
The strategy reads the longer trend as constructive and can hold bullish exposure unless another rule overrides it.
5 EMA below 20 EMA
In the breakout strategy, this can support a bearish read if slope and breakout conditions also agree.
Watch For
- Moving averages are lagging indicators; they confirm trend after price has already moved.
- Very short moving averages can flip often and create more trades.
- A price crossing a moving average is more useful when combined with volatility, momentum, or breakout checks.