What is Guppy Multiple Moving Average (GMMA)?
GMMA is an acronym for Guppy Multiple Moving Average and it is one of the momentum indicators and technical trading tools. Let’s deep dive into the GMMA indicator!
The Guppy Multiple Moving Average attempts to predict a likely break out in the price of a commodity or asset.
An Australian trader and a financial columnist by the name of Daryl Guppy first came up with the GMMA Indicator.
This determines the perspective of price in respect to the movement of the two dissimilar groupings of moving averages.
It does this by incorporating multiple moving averages in diverse timeframes. This makes use of both short-term and long-term moving average clusters.
How does GMMA Indicator works?
Guppy Multiple Moving Average is a technical indicator that discovers changes in trends, breakouts, and trading chances existing in a commodity’s price by incorporating two clusters of moving averages (MA) with dissimilar timeframes.
GMMA indicator comprises of two groups of moving averages namely: short-term and long-term moving average group.
The two GMMA groups contain six moving averages each with a total of twelve averages. A GMMA asset’s price chart uses these twelve moving averages.
You can position the short-term moving average that is on the GMMA price chart to 3, 5, 8, 10, 12, and 15 periods.
Inversely, you can position the long-term moving average on the GMMA price chart to 30, 35, 40, 45, 50, and 60 periods.
Whenever the short-term moving average group cross beyond the long-term MA group. It signals a possible emergence of an uptrend in the price of the asset.
On the other hand, if the short-term MA group drops beneath the long-term MA group. It signals a possible beginning of a downtrend in the price of an asset.
What Does Guppy Multiple Moving Average (GMMA) denote?
You can determine the strength of a trend by making use of the rate at which the short-term and long-term moving averages are apart.
If they are wide apart, then the impending trend will be strong but if the proximity between them is close. Then this signifies a weak signal.
Traders can depict trend reversals through the crossover of both short-term and long-term moving averages. Whenever the short-term MA moves beyond the long-term MA that indicates a bullish reversal but if the short-term MA goes beneath the long-term MA. Then that signals a bearish reversal.
However, in a situation where these two groups are going in a horizontal direction, perpendicular to each other. Then it indicates the asset is deficient in price trend. And as a result, not a good time for trending trades but could be an ideal time for range trading.
Being a trader, the ability to discover the movement of a trend and to catch the trend is never sufficient.
The accomplishment of a trending trade does not end at the ability of a trader capable of discovering trend direction and catching it when it commences.
But rather, it gets complete when such a trader knows the right time to drop out of a trade as soon as a trend reversal occurs.
And here is where the GMMA indicator comes in handy as it is a trend change tool. It provides a trader with the capability of knowing exactly when to enter and exit a trade.
The ideal entry time for a trader to get into a trade is when a reversal occurs and this happens whenever both the short-term and long-term moving average crosses over. Using the GMMA, a trader would buy when the short-term MA group moves above the long-term group.
Conversely, such a trader would sell as soon as the short-term MA group drops beneath the long-term MA group.
Guppy Multiple Moving Average (GMMA) Calculation
The Guppy indicator’s formula makes use of exponential moving averages. Guppy comprises a short-term group of moving averages and a long-term group of moving averages.
Each group consists of six moving averages with a total of twelve moving averages for the two MAs groups.
You can then input your desired number of periods, N, into the formula to determine each of the MA values. For instance, use five to calculate the five-period averages, and use 50 to solve the 50 periods EMA.
- Solve the SMA for N
- Solve the multiplier with the same N value
- Use the most recent closing price, the multiplier, and SMA to solve the EMA. You can insert the SMA in the EMA previous day position in the calculation. As soon as you solve the EMA, you’ll not need the SMA anymore since you can adopt the EMA solution in the EMA previous day position for the next solution.
- Iterate the procedure for the next N value, till you have acquired all the EMA readings for the 12 moving averages.
Shortcomings of the Guppy Multiple Moving Average (GMMA)
One of the major shortcomings of the GMMA is that it is a lagging indicator. This is because Guppy comprises moving averages and as we know, Mas are lagging indicators.
Lagging indicators provide traders with signals after the commencement of a trend.
This forces a trader to wait for the moving averages to crossover which in turn makes it too late for a trader to make either an entry or exit into a trade. And a late entry or exit translates to the significant movement of price.
These are why the GMMA indicator is a trend-following indicator. It doesn’t attempt to forecast when a trend will commence but instead. It patiently waits for it to develop and then moves along with it.
All moving averages are susceptible to whipsaws and this affects Guppy as well. You’ll experience a whipsaw wherever a crossover takes place and this indicates an entry.
And instead of the price going in the expected direction, it fails to and heads back in the opposite direction. This leads to the crossing over of the moving averages once again, indicating an exit.
You can use the GMMA indicator to discover trend changes, as well as for determining the strength of a certain trend.
It is advisable to incorporate them with other technical trading indicators and not solely use them independently as no indicator is completely accurate.
For example, incorporate the Guppy with the relative strength index (RSI). It affirms if a trend is receiving top-heavy and ready for a reversal, or views other available chart patterns to decide alternative possible entry and exits points after the occurrence of a Guppy crossover.
You can represent the GMMA (also known as “Guppy” and its short-term MAs) in blue color and give signals.
On the other hand, you can represent the long-term MAs with red color and they predict the trend. The GMMA has the ability to help you identify both trend reversal and trend continuation.
Trading with the trend aid traders to have more wins than losses. GMMA is a trend following indicator.
The GMMA indicator can help a trader to envisage both trend continuation and trend reversal situations. As much as Guppy is a simple indicator, it works effectively during a clear trend.
With Guppy, it is best to trade in the path of the long-term moving average group. The rate of separation in the long-term group of moving averages determines the strength of the long-term.
The immediate trading sentiment and the whole trend are in agreement whenever the two moving average groups are going in a similar direction.
Either they are both going in the upward or downward trend. Whenever the two groups get together at the same time, you’ll get a signal of a likely change in trend.