How to Trend Trade with GMMA (Guppy Multiple Moving Average)

GMMA in forex trading is best suited to illustrate market trends, identify support & resistance zones, and give accurate buy/sell signals. This will help traders to make better decisions. This article provides a detailed study of the GMMA.

What Is the Guppy Multiple Moving Average (GMMA)?

Guppy Multiple Moving Average (GMMA) is a technical device that can be used to predict potential price breakouts for an asset. This theory was introduced by Daryl Guppy, an Australian financial writer, in his book called “Trading Tactics.”

GMMA employs exponential moving averages (EMA) to emphasize the differences between stock prices and their values. In many cases when these factors are in line with each other it means there is a change of trend coming up. According to Guppy, GMMA does not lag behind but gives early warning of price-value change.

This consists of two groups of moving averages: short-term and long-term. There are six moving averages in each group so there are twelve on the S&P 500’s chart. The short-term MAs rely on look back periods of 3, 5, 8, 10, 12 and 15 while the long term MA use look back periods of 30, 35, 40,45 ,50,and 60.

• Short-term MAs: 3, 5, 8, 10, 12, and 15
• Long-term MAs: 30, 35, 40, 45, 50, and 60

When the short-term MAs cross above the long term ones it signals an uptrend. When the short term crosses get below/ beneath the long term ones it shows a probable downtrend.

Daryl Guppy named and developed a technical analysis tool called Guppy Multiple Moving Averages as an Australian trader.

How to Calculate the Guppy Multiple Moving Average

The Guppy indicator uses exponential moving averages (EMA). There are two groups of MAs: short-term and long-term, each with six MAs, making a total of 12. You can choose your preferred number of periods (N) for the calculation.

The formula for the GMMA is:

EMA = [Close Price – EMA (previous period)] x Multiplier + EMA (previous period)

Or

SMA = Sum of N Closing Prices / N

Where:

• EMA = Exponential Moving Average
• SMA = Simple Moving Average (used for the first calculation instead of EMA)
• N = Lookback period
• Multiplier = 2 / (N + 1)

Steps to Calculate the GMMA

Calculate the SMA for N:

• Sum the closing prices of the last N periods and divide by N.

Calculate the Multiplier:

• Use the same N value in the formula: 2 / (N + 1).

Calculate the EMA:

• Use the most recent closing price, the multiplier, and the SMA to calculate the EMA.
• The SMA is used in place of the EMA for the previous day in the first calculation. After the first EMA is calculated, use this EMA for subsequent calculations.

Repeat the Process:

• Repeat these steps for each required MA.
• Adjust the N value to get different EMA readings (e.g., use N = 3 for a 3-period average, and N = 60 for a 60-period average).
• Continue until you have calculated all 12 MAs.

What Does the GMMA Tell You?

The gap between the short-term and long-term moving averages (MAs) shows the strength of a trend. A wide gap means the trend is strong, while a narrow gap or crisscrossing lines indicate a weakening trend or a period of consolidation.

When the short-term MAs cross above the long-term MAs, it signals a bullish reversal. If the short-term MAs cross below the long-term ones, it signals a bearish reversal.

If both groups of MAs move sideways and are heavily intertwined, it means the asset lacks a clear price trend and may not be good for trend trades. However, these periods might be suitable for range trading.

How to Set Up the Guppy Multiple Moving Average

It is easy to set up GMMA on your trading platform, which is important. Here’s an easy guide:

1. Locate the Indicator Section: As a trader, you need to log in your trading platform and find the charting section. From there, you will be able to locate ‘Indicators.’
2. Look for GMMA: In this case, go through the list of indicators and look for ‘Guppy Multiple Moving Average’ or ‘GMMA’. It could also be listed as ‘Exponential Moving Averages’.
3. Apply the Indicator: To add it onto your chart click GMMA. This would usually attach default short-term and long-term EMAs such as those Daryl Guppy himself put forward.
4. Customize Settings: Most platforms have options that allow user customization. These are where one can manually enter their EMA periods, select different colors in order to make them more visually appealing or change the thickness of lines so that things become clearer.
5. Test the Setup: Before making any trades based on GMMA patterns, it is better to start with a demo account just to get used to it when applied to your preferred asset.
6. Use Other Indicators: For higher accuracy of predictions related to GMMA, it is useful applying other technical indicators. Try adding MACD or RSI from this same ‘Indicators’ section.
7. Save Your Settings: Set everything up then save your settings for future reference.
8. Remain Updated: Most trading platforms do release updates frequently. Thus ensure that your GMMA settings remain intact even with every update released by these platforms.

How to Use the Guppy Multiple Moving Average

The Guppy Multiple Moving Average helps identify changes in trend direction and measure the strength of the current trend.

How to Identify Trend Strength

• The separation between short- and long-term moving averages indicates trend strength.
• A wide separation means the trend is strong.
• A narrow separation or intertwined lines suggest a weakening trend or consolidation period.

How to Identify Trend Reversals

• A crossover of short- and long-term moving averages signals trend reversals.
• If short-term EMAs cross above long-term moving averages, it’s a bullish crossover, indicating a bullish reversal.
• If short-term EMAs cross below long-term moving averages, it’s a bearish crossover, indicating a bearish reversal.

How to Identify a Lack of Trend

• When moving averages are close together and nearly parallel, it means short-term market sentiment and long-term trend agree.
• If both groups of EMAs move horizontally or intertwine, the price lacks a trend.
• In such cases, prices move up and down within a range, suitable for range trading.
• Trend traders should wait for better conditions when the market is sideways.

Remember: “When the market is sideways, trend traders sit on the sidelines.”

How to Trade Currencies with the Guppy Multiple Moving Average

You can use the GMMA indicator for trade signals.

Buy Signals

• When all short-term EMAs move above all long-term EMAs, it shows a new upward trend and signals a buy.
• In a strong uptrend, if short-term MAs move towards long-term MAs but don’t cross, then move higher again, it signals the uptrend is continuing and triggers a buy.
• After a crossover, if prices drop but then bounce off long-term EMAs, it signals the uptrend is continuing and triggers a buy.

Sell Signals

• When all short-term EMAs move below all long-term EMAs, it shows a new downward trend and signals a sell.
• In a strong downtrend, if short-term MAs move towards long-term MAs but don’t cross, then move lower again, it signals the downtrend is continuing and triggers a sell.
• After a bearish crossover, if prices rise but then bounce off long-term EMAs, it signals the downtrend is continuing and triggers a sell.

No Signal

• Avoid the buy and sell signals above when prices and EMAs are moving sideways. After a period of consolidation, wait for a crossover and separation. If there is no trend, the GMMA indicator will not work.

Limitations of the GMMA

The main limitation of the Guppy and the EMAs it includes is that it lags behind. Each EMA shows the average price from the past and does not predict the future.

Waiting for the averages to cross can sometimes lead to late entries or exits because the price has already moved significantly. All moving averages can also give false signals. This happens when a crossover suggests a trade, but the price doesn’t move as expected, causing the averages to cross again and resulting in a loss.

Traders should use the GMMA along with other technical indicators to improve their chances of success. For example, traders can check the relative strength index (RSI) to see if a trend is likely to reverse or look at various chart patterns to find other entry or exit points after a GMMA crossover.

GMMA Compression Breakout Strategy

Moving averages act as support and resistance levels. When both groups of moving averages compress on the same candlestick, it could signal a trend change. Here’s how to set up the trade:

1. Find a candlestick where the high and low break through all twelve moving averages.
2. Place a buy stop order above the high and a sell stop order below the low of the candlestick.
3. Once one order is filled, use the other order as your initial stop-loss level.
4. Move your stop to the prior candlestick’s low (if going long) or high (if going short) until you exit the position.

Conclusion

Guppy Multiple Moving Average (GMMA) is an effective indicator for those traders who would like to capture the two markets which are short-term and long-term. It is however important to note that even though this tool can guide you on the market trends there are certain limitations it may not always offer immediate signals as at when they happen. A wise trader will not only depend on GMMA alone; he or she incorporates other indicators and volume data in addition to having a good understanding of the market environment.

FAQs

How to read the Guppy Multiple Moving Average?

When short-term EMAs cross above long-term EMAs, it means a bullish crossover has happened, suggesting a bullish reversal. When short-term EMAs cross below long-term EMAs, it means a bearish crossover has happened, suggesting a bearish reversal.

How do you find the trend using moving averages?

A rising moving average shows an uptrend, while a falling moving average shows a downtrend. Using longer timeframes (like 4-hour, daily, or weekly) helps you see the trend direction more clearly.

What is the best moving average for trend trading?

It depends on whether you’re trading short-term or long-term. For short-term trades, use 5, 10, or 20-period moving averages. For long-term trades, use 50, 100, or 200-period moving averages.

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• Best Timeframes in Forex Trading