mong the many technical indicators that you will get your hand on is the Guppy Multiple Moving Average (GMMA). It identifies changing trends by combining two groups of moving averages with differing time periods.
The Guppy indicator sounds like GBP/JPY, but please note the difference and don’t embarrass yourself in public by mistaking the currency pair’s name with the indicator’s name.
The first thing you should know is that it is a trend-following technique, which is composed of 12 EMAs (or exponential moving averages).
By placing multiple lines on your chart, it is easier to comprehend the strength or weakness in the trend than if only using one (or two) EMAs.
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.
You can see in the chart that the two groups of EMA are differentiated by color.
Blue represents the short-term group, while the “long-term” group is red.
For example, you would want to enter a trade when a trend reversal occurs, which happens when one group crosses over the other group.
If the short-term group crosses ABOVE the longer-term group, it gives you a BUY signal.
If the short-term group crosses BELOW the longer-term group, it gives you a SELL signal.
Setting Up the Guppy Multiple Moving Average
Like we said the Guppy Multiple Moving Average is created using two sets of moving averages:
Short-term: The first set of moving averages has a relatively brief timeframe. They are used to assess short-term trading activity. The number of days used in these moving averages is usually 3, 5, 8, 10, 12, or 15.
Long-term: The second set of moving averages use extended time periods and are used to assess long-term investor activity. The number of days used in these moving averages is usually 30, 35, 40, 45, 50, or 60.
When you plot these twelve moving averages on your chart, you need to be looking for fractal repetitions.
Basically, the relationship between the two sets of moving averages will determine if the short-term trading outlook aligns with the long-term investment outlook.
By looking at the various moving averages, you will define where the short- and long-term sentiment lie in relation to each other.
Let’s see both groups of EMAs on the chart.
These two groups of EMAs can show you if there are trend reversals and continuations.
How does Guppy Multiple Moving Average work?
The indicator is used either to identify the changes in trends or gauge the strength of the current trend.
Trend Strength: The degree of separation between the short- and long-term moving averages indicates the trend’s strength.
If there’s a wide separation, then the prevailing trend is strong, and vice versa.
And if it is a narrow separation between the two averages, it will mean that the trend is going weaker than before or a period of consolidation, when neither bulls nor bears can take over.
Trend Reversal: If there is a convergence of the short- and long-term moving averages, it represents trend reversals.
If the short-term crosses above the long-term moving averages, then a bullish reversal has occurred, and if it is below, it indicates a bearish reversal.
A Lack of Trend
The indicator won’t show you what is the trend if the moving averages between the two groups are close together or moving in parallel because the short-term market sentiment and long-term trend are in agreement and there is a lack of trend.
You will notice in the chart above that the red and blue groups of EMAs are intertwined.
This means that the price is directionless.
If you have a range trading strategy, these price moves will fit, but if you are a trend trader, it’s better to sit tight and wait for some price actions.
What does the Guppy Multiple Moving Average indicate?
Let’s see what signals the GMMA indicator can give us and how to recognize them.
In the case of short-term EMA crossing above all the long-term EMAs, the indicator shows you a new bullish trend, therefore you can go long.
Let’s say you have a strong uptrend.
If the short-term MAs move back toward the longer-term MAs but do NOT cross. And after that they start to move back higher, this will mean that the bullish trend is in continuation, so you have a buy signal.
It can happen after a crossover, as well. If you have a crossover and then the price falls back before bouncing off from the longer-term EMAs, it indicates a continuation of the bullish trend again.
If the scenario is that all short-term EMAs cross below all the long-term EMA, you will know that there is a new bearish trend, which gives you a sell signal.
It works the same as the previous case with the buy signals, but instead of an uptrend you have a strong downtrend and the short-term MAs move back toward the longer-term MAs, but do NOT cross.
Then they continue to move lower, which indicates a continuation of the bearish trend. As it follows you have to go short.
You have the same signal of a continuation of the bearish trend after a bearish crossover if the price rises but then bounces off from the long-term EMAs.
The indicator won’t always show you clear buy and sell signals. If the price and the EMAs are moving sideways, you should wait for a crossover or separation at least.
You can’t use or rely on the GMMA indicator if there is NO trend.
Scenario with GMMA Compression Breakout Strategy
As many of the technical indicators, GMMA can act as support and resistance levels.
If both groups of moving averages are squeezing on the same candlestick, this could mean that there is an overall trend change.
This is what you need to do if you notice a compression of both groups:
- Firstly, you need to look for a candlestick in which the high and low go through all twelve moving averages.
- Secondly, you could place a buy stop order above the high and sell stop order below the low of the candlestick.
- Then the order will be filled and you should 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.
Let’ see how it will look on a chart and play out this trade setup:
Here, both groups of EMAs are tightly compressed. In this case, the last candle opened below all moving averages, and then it closes above all moving averages.
The compressed EMAs will be your resistance level, above which the price closes.
You can earn some pips if you place your buy stop order above the candle’s high and a sell stop order below the low.
When you look at the next candle, you will see that the price rises which will trigger your buy stop order. Consequently, your previous sell stop order now becomes your initial stop loss.
Then the price continues to move up. So you do the same with every candle that makes a new higher low, you trail your stop loss and use this as the new stop loss until you get stopped out.
Disadvantages of the Guppy Multiple Moving Average (GMMA)
We reached the point when we disclose that the Guppy indicator isn’t perfect.
Its biggest disadvantage is that it is a lagging indicator.
It is due to the fact that the Guppy consists of exponential moving averages (EMAs), and as you know, EMAs are lagging indicators.
In case you have forgotten or you have skipped this lesson, let’s remind you what a lagging indicator means.
It gives a signal after the trend has started, so while you are waiting for the EMAs to cross over, you could miss out on the start of the trend. By the time the indicator gives you a signal, the price could have already moved significantly.
You will experience the same thing with any trend-following indicator. You will always be late for getting into a trade, because it has already started, and late for getting out of a trade because it has already ended.
Now you understand why they are called a trend-FOLLOWING indicator. You don’t use them to predict when a trend will start, you wait for it to form first, and then you simply follow it.
Another disadvantage is that all moving averages sometimes tend to whipsaw.
You will be whipsawed when there is a crossover, which initially signals an entry, but then the price moves in the opposite direction of what you expected, causing the EMAs to cross again, which signals an exit (and realized loss).
By now, you are probably confused on a higher level than you could have imagined.
It is like a pizza. At first, nothing makes sense, but you know it is very delicious and self-rewarding.
Square box, round pizza, triangle slices. How does all of this geometry fit each other so perfectly?
But it does! Same with the Guppy, you will get used to it and you will see how each component of every technical indicator can fit your chart and your trading strategy.
We will give you some tips for trading the Guppy:
- Trade in the direction of the long-term group of EMA.
- The long-term trend strength depends on the degree and nature of separation in the long-term group of EMAs.
- The short-term market sentiment is defined by the degree and nature of separation in the short- term group of EMAs.
- If both groups are moving in the same direction (both trending up or down), it means that the current market sentiment and the overall trend are in agreement.
- If you notice a compression of both groups at the same time, it could indicate a potential overall change.
We know it’s hard to tune in because there are about 10 different things going at the same time in the chart. But take your time and let it sink in for a while. You don’t need immediately to jump into using this indicator if you still don’t get completely how it works.