The simplest method for using the Guppy Multiple Moving Average indicator is to trade a basic moving average crossover system using all twelve of the GMMA EMAs. This system would buy when all of the short-term EMAs cross above all of the long-term EMAs, and sell when the short term EMAs cross below the long-term EMAs.
- The Guppy Multiple Moving Average (GMMA) is a technical indicator that identifies changing trends, breakouts, and trading opportunities in the price of an asset by combining two groups of moving averages (MA) with different time periods.
- The GMMA consists of a short-term group of MAs and a long-term group of MAs, both containing six MAs, for a total of 12, and is overlaid on the price chart of an asset.
- The short-term MAs are typically set at 3, 5, 8, 10, 12, and 15 periods. The longer-term MAs are typically set at 30, 35, 40, 45, 50, and 60.
- When the short-term group of averages moves above the longer-term group, it indicates a price uptrend in the asset could be emerging.
- Conversely, when the short-term group falls below the longer-term group of MAs, a price downtrend in the asset could be starting.
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.
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