The Guppy Multiple Moving Average (GMMA) indicator provides an interesting approach using moving average ribbons.
As a trend trader, it’s not enough to just identify the direction of a trend and catch the trend.
Trend trading success depends not only properly identifying the trend direction and catching the trend after it has started, but also on getting out as soon as possible after the trend has reversed.
If you find yourself struggling with any of the above, you might want to take a look at the Guppy Multiple Moving Average indicator.
The Guppy Multiple Moving Average (GMMA), also known simply known as”Guppy“, is a technical indicator that identifies changes in trends, which means it provides you with an objective method to know when to get in and when to get out of a trade.On a chart, it looks like this…
The Guppy was created by an Australian trader named Daryl Guppy. Hence, the name of the indicator.
Don’t confuse “Guppy”, the indicator, with “Guppy”, the nickname for the GBP/JPY. They are two different things. This means that you can trade the Guppy (currency pair) using the Guppy (indicator). 😂
Daryl introduced GMMA in his book, Trend Trading“.
The Guppy is a trend-following technique composed of 12 EMAs (or exponential moving averages).
The multiple lines of the Guppy help traders see the strength or weakness in a trend better 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.
In the chart above, the two groups of EMA are differentiated by color.
The “short-term” group is blue, while the “long-term” group is red.The trend is determined by the long-term EMAs, signals are given by the short-term EMAs.
You would enter a trade when a trend reversal occurs, which is indicated when one group crosses over the other group.
When the short-term group crosses ABOVE the longer-term group, BUY.
When the short-term group crosses BELOW the longer-term group, SELL.
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 identify changes in trend direction or gauge the strength of the current trend.
How to Identify Trend Strength
The degree of separation between the short- and long-term moving averages can be used as an indicator of trend strength.
If there’s a WIDE separation, this indicates that the prevailing trend is strong.
If there’s a NARROW separation or lines that intertwine, this indicates a weakening trend or a period of consolidation.
How to Identify Trend Reversals
The crossover of the short- and long-term moving averages represents trend reversals.
If the short-term EMAs cross ABOVE the long-term moving averages, this is known as a bullish crossover and indicates that a bullish reversal has occurred.
If the short-term EMAs cross BELOW the longer-term ones, this is known as a bearish crossover and indicates that a bearish reversal is occurring.
How to Identify a Lack of Trend
When the moving averages between the two groups are close together and approximately parallel, it indicates that the short-term market sentiment and long-term trend are largely in agreement.
Basically, when both groups of EMAs are moving horizontally, or mostly moving sideways and heavily intertwined, it means the price lacks a trend.
Looking at the chart above, notice how when the red and blue group of EMAs are intertwined, price is directionless, simply moving up and down within a range.
This current price action is more suitable for range trading. As a trend trader, it would make sense to sit out and wait for better conditions.
Just remember this phrase, “When the market is sideways, trend traders sit on the sidelines.”
How to Trade Currencies with the Guppy Multiple Moving Average
The GMMA indicator can be used for trade signals.
Buy Signals
When all short-term EMA cross above all the long-term EMAs, a new bullish trend is confirmed and triggers a buy signal.
During a strong uptrend, when the short-term MAs move back toward the longer-term MAs, but do NOT cross, and then start to move back higher, this signals another continuation of the bullish trend and triggers a buy signal.
Also, after a crossover, if prices fall back and then bounces off from the longer-term EMAs, this signals a continuation of the bullish trend and triggers a buy signal.
Sell Signals
When all short-term EMAs cross below all the long-term EMA, this indicates a new bearish trend and triggers a sell signal.
During a strong downtrend, when the short-term MAs move back toward the longer-term MAs, but do NOT cross, and then start to move lower, this signals a continuation of the bearish trend and triggers a sell signal.
Also, after a bearish crossover, if the price rises but then bounces off from the long-term EMAs, this signals a continuation of the bearish trend and triggers a sell signal.
No 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
The moving averages also act as support and resistance levels.
When compression of both groups of moving averages occurs on the same candlestick, this could indicate an overall trend change.
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:
In the chart above, both groups of EMAs have become tightly compressed. Notice how the last candle opened below all moving averages and managed to close above all moving averages.
This can be interpreted as the price being able to close above a resistance level (the compressed EMAs).
Set a buy stop order above the candle’s high 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 because the Guppy consists of exponential moving averages (EMAs), and we’ve mentioned in a previous lesson, EMAs are lagging indicators.
A lagging indicator gives a signal after the trend has started.This means that waiting for the EMAs to cross over can sometimes result in an entry or exit that is too late, as the price has already moved significantly.
With any trend-following indicator, you’re always going to end up getting into a trade AFTER the trend has already started, and end up getting out of a trade AFTER the trend has already ended.
That’s why it’s called a trend-FOLLOWING indicator. You don’t try to predict when a trend will start, you wait for it to form first, and then you simply follow it.
Also, all moving averages are also prone to whipsaws.
A whipsaw occurs where there is a crossover, which signals an entry, but instead of price moving in the expected direction, it moves backs in the opposite direction, causing the EMAs to cross again, which signals an exit (and realized loss).
Summary
The Guppy Multiple Moving Average is a trend-following system.
Trading with the trend helps you win more than lose.
The Guppy can help you visualize both scenarios of either a trend reversal or a trend continuation.
Although a simple indicator, the Guppy system only works best when the price is in a clear trend.
There is no technical indicator that is right all the time. (If you find one, please let us know.)
Here are some tips for trading the Guppy:
- Trade in the direction of the long-term group of EMA.
- The degree and nature of separation in the long-term group of EMAs define long-term trend strength.
- The degree and nature of separation in the short-term group of EMAs define the short-term market sentiment.
- When both groups are moving in the same direction (both trending up or down), current market sentiment and the overall trend are in agreement.
- A compression of both groups at the same time indicates the potential for a trend change.