Guppy multiple moving average (GMMA) indicatorprovides an interesting alternative to other popular indicators.
The GMMA implements 2 different exponentialmoving averages (EMAs) in an effort to analyze market behavior on multiple levels.
The Guppy indicator is composed of 12 EMAs, so essentially the Guppy and an EMA are the same thing.
Guppy will help you to isolate trades, spotopportunities, and warn about price reversals.
The multiple lines of the Guppy will helpyou to see the strength or weakness in a trend better than if only using one or two EMAs.
The Guppy multiple moving average (GMMA) isan indicator that tracks the activity of the two major groups in the market.
These are investors and traders.
Traders are always probing for a change inthe trend.
In a downtrend they will take a trade in anticipationof a new uptrend developing.
If it does not develop, then they get outof the trade quickly.
If the trend does change, then they stay withthe trade, but continue to use a short term management approach.
No matter how long the uptrend remains inplace, the trader is always alert for a potential trend change.
Often they use a volatility based indicator, or a short term 10 day moving average, to help identify the exit conditions.
We track their activity by using a group ofshort term moving averages.
These are 3, 5, 8, 10, 12 and 15 day exponentiallycalculated moving averages.
Strong trends are supported by long term investors.
These are the true gamblers in the marketbecause they tend to have a great deal of faith in their analysis.
The investor takes more time to recognizethe change in a trend.
We track the investors’ activity by usingthe 30, 35, 40, 45, 50 and 60 day exponentially calculated moving average.
So the GMMA attempts to identify trends bycombining two groups of moving averages with different time periods.
The long-term EMAs (exponential moving average)represent the interests and behaviors of investors that have taken a long-term approach to agiven market.
The short-term EMAs represent traders, orspeculators, who are attempting to capture short-term profits.
The relationship within each of these groupstells us when there is agreement on value – when they are close together – and whenthere is disagreement on value – when they are well spaced apart.
The relationship between the two groups tellsthe trader about the strength of the market action.
A change in price direction that is well supportedby both short and long term investors signals a strong trading opportunity.
Guppy is an easy indicator that will allowanyone to determine the overall trend of the market quickly and without personal bias.
And of course, once you know the general directionof a trending market, the odds of a successful trade increase.
The GMMA also offers insight into potentialreversals or periods of consolidation by signaling changes in market sentiment.
Although Guppy is a standalone trading strategy, I have found great results combining Guppy with price action, but we’ll talk aboutthis later.
So, how to read the GMMA? The Guppy multiple moving average can be usedto identify changes in trends or determine 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 prevailingtrend is strong.
Narrow separation, or lines that are crisscrossing, indicates a weakening trend or a period of consolidation.
The crossover of the short- and long-termmoving averages represent trend reversals.
If the short-term crosses above the long-termmoving averages, then a bullish reversal has occurred.
If the short-term mas cross below the longer-termones, then a bearish reversal is occurring.
When both groups of mas are moving horizontally, or mostly moving sideways and heavily intersected, it means the asset lacks a price trend, andtherefore may not be a good candidate for trend trades.
These periods may be good for range trading.
The indicator can also be used for trade signals.
When the short-term group passes above thelong-term group of mas, the market is bullish.
When the short-term group passes below thelonger-term group, the market is bearish.
These signals should be avoided when the priceand the mas are moving sideways.
Following a consolidation period, pay attentionat crossovers and separation.
When the lines start to separate this oftenmeans a breakout from the consolidation has occurred and a new trend could be underway.
During a strong uptrend, when the short-termmas move back toward the longer-term mas (but don't cross) and then start to move back theupside, this is another opportunity to enter into long trades in the trending direction.
The same concept applies to downtrends forentering short trades.
The green moving averages represent short-termtraders and red represents long-term traders.
When both the red and green lines are movingin agreement (both trending up or down), we are given a confirmation of market sentimentand trend.
The moving averages may also act as supportand/or resistance.
When price finds support at these levels, it might be a good time to add positions if you see further upside potential or you havespare risk capital available.
When price tests the red moving average zone, long-term traders will look to buy more given their outlook is still bullish.
The strength of the trend is determined bythe distance between the red and green moving average clusters.
The further the distance, the greater thetrend.
Another way to evaluate the strength of atrend is to evaluate the spread between each moving average cluster.
If the long-term red averages are spread outnicely, this indicates that the support/resistance level is broad and strong.
If the lines within a cluster are narrowing, this indicates momentum is declining, and a reversal or consolidation could follow.
Just like simple moving averages, you canuse crossovers as entry and exit signals.
When the short-term moving average clustercrosses over the long-term, this signals a change in market sentiment and suggest thatshort-term traders are starting a new trend.
For instance, this Guppy crossover indicatesthat short-term traders have become optimistic about this pair and could potentially starta new bullish trend.
The strength of the trend is determined bythe distance between the red and green moving average clusters.
Like I said before, the farther the distance, the greater the trend.
Now, if you followed my previous videos onmoving averages, you probably know that I’m not the biggest fan of moving average crossovers.
Since the GMMA indicator was designed fortrending assets; these moving averages run into problems when price consolidates.
The indicator shows consolidation and potentialreversals when the short and long-term moving averages condense.
The main limitation of the Guppy indicatoris the lagging factor.
Each EMA represents the average price fromthe past.
It does not predict the future.
Waiting for the averages to cross can at timesmean 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, potentiallyresulting in a trade, but the price doesn't move as expected and then the averages crossagain resulting in a loss.
So, in times of consolidation, with multiplecrossovers, i find it useful to combine price action with GMMA.
You could also use the Guppy multiple movingaverage in conjunction with other technical indicators to maximize your trading odds.
For example, you might look at the relativestrength index (RSI) to confirm a trend, or look at various chart patterns to determineother entry or exit points after a GMMA crossover.
From my experience, the GMMA is also usefulfrom breakout trading, when the price is moving outside a defined support or resistance levelwith increased volume.
A breakout trader enters a long position afterthe price breaks above resistance or enters a short position after the price breaks belowsupport.
The reason breakouts are such an importanttrading strategy is because these setups are the starting point for future volatility increases, large price swings and, in many circumstances, major price trends.
Breakouts occur in all types of market environments.
Typically, the most explosive price movementsare a result of channel breakouts and price pattern breakout.
So when there is lots of separation betweenthe GMMAs, this helps confirm the price trend in the current direction.
Look for agreement between the short termand long term moving averages and pay attention to chart formations such as channels, triangles, and flags.
Whether you use intraday, daily or weeklycharts, the concepts are universal.
You can apply this strategy to day trading, swing trading or any style of trading.
Once you spot a clear trade setup in yourdesired time frame, remember to set the stop loss just above or below short term movingaverages.
Or, if you want more room, decrease your lotsizes and place it below or above the longer term moving averages.
Although a simple indicator, the GMMA canoffer valuable insight to any momentum or swing trader.
Guppy is a standalone trading strategy; however, i have found the greatest returns when combining Guppy with price action, because price actionaddresses periods of consolidation, where Guppy tends to underperform.
So always try to maximize your chances ofa great trade by confirming your bias with other tools.
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Until next time.
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