What Is the Guppy Multiple Moving Average (GMMA)?
The Guppy Multiple Moving Average (GMMA) is a technical indicator that aims to anticipate a potential breakout in the price of an asset. The term gets its name from Daryl Guppy, an Australian financial columnist and book author who developed the concept in his book, "Trading Tactics."
The GMMA uses the exponential moving average (EMA) to capture the difference between price and value in a stock. A convergence in these factors is associated with a significant trend change. Guppy maintains that the GMMA is not a lagging indicator but a prior warning of a developing change in price and value.
- 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.
Guppy Multiple Moving Average (GMMA) Formula and Calculation
The formula for the Guppy indicator uses exponential moving averages (EMA). There is a short-term group of MAs and a long-term group of MAs, both containing six MAs, for a total of 12. However, one can insert their preferred 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
Calculating the Guppy Multiple Moving Average (GMMA)
Repeat the steps below for each of the required MAs. 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 MAs.
What Does the Guppy Multiple Moving Average (GMMA) Tell You?
The degree of separation between the short- and long-term MAs 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, on the other hand, indicates a weakening trend or a period of consolidation.
The crossover of the short- and long-term MAs represent trend reversals. If the short-term crosses above the long-term MAs, then a bullish reversal has occurred. Conversely, if the short-term MAs cross below the longer-term ones, then a bearish reversal is occurring.
Meanwhile, 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 GMMA can be employed to identify changes in trends or gauge the strength of the current trend and are best used in conjunction with other technical indicators.
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 to 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.
The Guppy Multiple Moving Average (GMMA) vs. an Exponential Moving Average (EMA)
The GMMA is composed of 12 EMAs, so it is essentially the same thing as an EMA. 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 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 MAs 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.
Traders should use the GMMA 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.