The Guppy Multiple Moving Average (GMMA) indicator uses moving average ribbons to provide an innovative approach.
As a trend trader, identifying the direction of a trend and catching the trend is not enough.
Trend trading success is dependent not only on correctly recognizing the trend direction and catching the trend after it has begun, but also on exiting as soon as the trend has reversed.
If you’re having trouble with any of the above, you might want to look into the Guppy Multiple Moving Average indicator.
The Guppy Multiple Moving Average (GMMA), sometimes known simply as “Guppy,” is a technical indicator that recognizes changes in trends, giving you an objective way to know when to enter and exit a trade.
On a graph, it looks like this:
Daryl Guppy, an Australian merchant, invented the Guppy. As a result, the indicator’s name.
Daryl first mentioned GMMA in his book, Trend Trading.
The Guppy is a trend-following strategy made up of 12 EMAs (or exponential moving averages).
The Guppy’s many lines allow traders to detect the strength or weakness of a trend more clearly than if only one (or two) EMAs were used.
The 12 EMAs are separated into two groups:
A “short-term” group of EMAs.
A “long-term” group of EMAs.
Each group contains six MAs.
The two groups of EMA are color-coded in the graphic above.
The blue group represents “short-term,” whereas the red group represents “long-term.”
The long-term EMAs dictate the trend, whereas the short-term EMAs provide signals.
When a trend reversal happens, which is indicated by one group crossing over the other, you would enter a trade.
BUY when the short-term group surpasses the longer-term group.
SELL when the short-term group falls BELOW the longer-term group.
How to Set Up the Guppy Multiple Moving Average
This technique consists of combining TWO groups of exponential moving averages (EMAs) with differing time periods (or lengths).
The twelve periods used are 3, 5, 8, 10, 12, 15, 30, 35, 40, 45, 50, and 60.
The 3, 5, 8, 10, 12, and 15 EMAs are used to show the short-term trend’s momentum.
The 30, 35, 40, 45, 50, and 60 EMAs show the longer-term trend’s momentum.
Now, let’s show both groups of EMAs on the chart.
Trend reversals and continuations can be identified with these two groups of EMAs.
How to Use the Guppy Multiple Moving Average
The Guppy Multiple Moving Average can be used to detect changes in trend direction as well as to assess the strength of the existing trend.
How To Identify Trend Strength
The distance between the short- and long-term moving averages can be used to gauge trend strength.
If the separation is WIDE, it suggests that the dominant trend is strong.
A NARROW separation or intertwined lines imply a weakening trend or a phase of consolidation.
How to Identify Trend Reversal
The crossover of the short- and long-term moving averages represents trend reversals.
A bullish crossover occurs when the short-term EMAs cross ABOVE the long-term moving averages, indicating a bullish reversal.
A bearish crossover occurs when the short-term EMAs cross BELOW the longer-term EMAs, indicating that a bearish reversal is taking place.
How to Identify a Lack of Trend
When the moving averages of the two groups are close together and nearly parallel, it implies that the short-term market sentiment and long-term trend are mostly in sync.
When both groups of EMAs are moving horizontally, or largely sideways and highly interlaced, it indicates that the price lacks a trend.
When the red and blue groups of EMAs are interlaced, price is directionless, just moving up and down within a range, as shown in the chart above.
This current price behavior lends itself well to range trading. It would make sense for a trend trader to sit out and wait for better conditions.
“When the market is sideways, trend traders sit on the sidelines,” as the saying goes.
How to Trade Currencies with the Guppy Multiple Moving Average
The GMMA indicator can be used to generate trading signals.
When all short-term EMAs cross above all long-term EMAs, a new bullish trend is confirmed and a buy signal is issued.
During a strong uptrend, when the short-term moving averages return to the longer-term moving averages but do not cross, and then begin to move higher, this implies the continuation of the positive trend and generates a buy signal.
In addition, following a crossover, if prices fall back and then bounce off the longer-term EMAs, this implies a continuation of the bullish trend and generates a buy signal.
Sell SignalsWhen all short-term EMAs cross below all long-term EMAs, a new negative trend begins and a sell signal is issued.
During a strong downturn, when the short-term moving averages return to the longer-term moving averages but do not cross, and then begin to move lower, this implies a continuation of the bearish trend and triggers a sell signal.
Also, if the price rises following a bearish crossover but then rebounds off the long-term EMAs, this implies a continuation of the bearish trend and triggers a sell signal.
The buy and sell signals above should be avoided when the price and the EMAs are moving sideways.
Following a consolidation period, wait for a crossover and separation.
|If there is no trend, this indicator will not work.
GMMA Compression Breakout Strategy
Moving averages also serve as support and resistance levels.
When both groups of moving averages compress on the same candlestick, it could suggest a shift in the general trend.
Here’s the trade setup:
- Look for a candlestick in which the high and low pierce through all twelve moving averages.
- Place a buy stop order above the high and sell stop order below the low of the candlestick.
- Once filled, make the opposite stop order (that wasn’t filled) your initial stop-loss level.
- Trail your stop at the prior candlestick’s low (if long) or high (if short) until stopped out of the position.
Here’s an example:
Both groups of EMAs in the chart above have been closely squeezed. Take note of how the latest candle opened below all moving averages but closed above all moving averages.
This can be viewed as the price closing above a resistance level (the compressed EMAs).
Place a purchase stop order above the high of the candle and a sell stop order below the low.
In the next candle, the price rises which triggers the buy stop order. The previous sell stop order now becomes your initial stop loss.
Price continues to rise. Whenever a candle makes a new higher low, you can trail your stop loss and use this as the new stop loss, until you get stopped out.
Limitations of the Guppy Multiple Moving Average (GMMA)
The main limitation of the Guppy is that is a lagging indicator.
This is due to the Guppy’s use of exponential moving averages (EMAs), which, as we discussed in a previous session, are lagging indicators.
A trailing indicator signals after the trend has begun.
Waiting for the EMAs to cross over can result in an entry or exit that is too late because the price has already changed sufficiently.
With any trend-following indicator, you will always enter a trade AFTER the trend has already begun, and you will always exit a trade AFTER the trend has already ended.
That is why it is referred to be a trend-FOLLOWING indicator. You don’t try to predict when a trend will begin; instead, you wait for it to form and then simply follow.
Furthermore, all moving averages are susceptible to whipsaws.
A whipsaw occurs when there is a crossing, which indicates an entrance, but instead of price advancing in the predicted direction, it reverses, forcing the EMAs to cross again, signaling an exit (and realized loss).
Next Lesson: How to Use Bollinger Bands