What is the Guppy Multiple Moving Average (GMMA)?
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. There is a short-term group of MAs, and a long-term group of MA. Both contain six MAs, for a total of 12. The term gets its name from Daryl Guppy, an Australian trader who is credited with its development.
- The Gruppy Multiple Moving Average (GMMA) is applied as an overlay 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.
- When the short-term group falls below the longer-term group of MAs, a price downtrend in the asset could be starting.
- When there is lots of separation between the MAs, this helps confirm the price trend in the current direction.
- If both groups become compressed with each other, or crisscross, it indicates the price has paused and a price trend reversal is possible.
- Traders often trade in the direction the longer-term MA group is moving, and use the short-term group for trade signals to enter or exit.
The Formulas for the Guppy Multiple Moving Average (GMMA) are
The Guppy indicator can use simple or exponential moving averages (EMA). EMAs are typically used. There are twelve moving averages. Insert the number of periods, N, into the calculation to find each of the MA values.
EMA=[Close price−EMAprevious]∗M+EMApreviousor:SMA=NSum of N closing priceswhere:EMA=exponential moving averageEMAprevious=the exponential moving average from the previous period(The SMA can substitute for the EMAprevious for the first calculation)Multiplier M=N+12SMA=simple moving averageN=number of periods
How to Calculate the Guppy Multiple Moving Average (GMMA)
There are 12 exponential moving averages in the Guppy indicator. Repeat the steps below for each of the required moving averages. Alter the N value to calculate the EMA you want. For example, use three to calculate the three-period average, and use 60 to calculate the 60-period EMA.
- Calculate the SMA for N.
- Calculate the Multiplier using the same N value.
- Use the most recent closing price, the multiplier, and SMA to calculate the EMA. The SMA is placed in the EMA Previous Day spot in the calculation. Once the EMA has been calculated, the SMA is no longer needed since the EMA calculation can be used in the EMA Previous Day spot for the next calculation.
- Repeat the process for the next N value, until you have the EMA reading for all 12 moving averages.
What Does the Guppy Multiple Moving Averages (GMMA) Tell You?
The Guppy Multiple Moving Average can be used to identify changes in trends or gauge the strength of the current trend.
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, then the prevailing trend is strong. Narrow separation, or lines that are crisscrossings, indicates a weakening trend or a period of consolidation.
The crossover of the short- and long-term moving averages represent trend reversals. If the short-term crosses above the long-term moving averages, then a bullish reversal has occurred. If the short-term MAs cross below the longer-term ones, then a bearish reversal is occurring.
When both groups of MAs are moving horizontally, or mostly moving sideways and heavily intertwined, it means the asset lacks a price trend, and therefore may not be a good candidate for trend trades. These periods may be good for range trading, though.
The indicator can also be used for trade signals. When the short-term group passes above the long-term group of MAs, buy. When the short-term group passes below the longer-term group, sell. These signals should be avoided when the price and the MAs are moving sideways. Following a consolidation period, watch for a crossover and separation. When the lines start to separate this often means a breakout from the consolidation has occurred and a new trend could be underway. During a strong uptrend, when the short-term MAs move back toward the longer-term MAs (but don't cross) and then start to move back the upside, this is another opportunity to enter into long trades in the trending direction. The same concept applies to downtrends for entering short trades.
Traders should use the Guppy Multiple Moving Average in conjunction with other technical indicators to maximize their odds of success. For example, traders might look at the Relative Strength Index (RSI) to confirm whether a trend is getting top-heavy and poised for a reversal, or look at various chart patterns to determine other entry or exit points after a GMMA crossover.
The Difference Between the Guppy Multiple Moving Average (GMMA) and an Exponential Moving Average (EMA)
The Guppy is composed of 12 EMAs, so essentially the Guppy and an EMA are the same thing. The Guppy is a collection of EMAs that the creator believed helped isolate trades, spot opportunities, and warn about price reversals. The multiple lines of the Guppy help some traders see the strength or weakness in a trend better than if only using one or two EMAs.
Limitations of Using the Guppy Multiple Moving Average (GMMA)
The main limitation of the Guppy, and the EMAs it is composed of, is that it is a lagging indicator. Each EMA represents the average price from the past. It does not predict the future. Waiting for the averages to crossover can at times mean an entry or exit that is far too late, as the price has already moved aggressively. All moving averages are also prone to whipsaws. This is when there is a crossover, potentially resulting in a trade, but the price doesn't move as expected and then the averages cross again resulting in a loss.