Key Questions Answered
If traders are to make any profits from trading, they must keep an eye out for various market trends, which can help them make decisions about buying or selling assets and predicting opportunities for lucrative trading. One such indicator that is widely used to decipher and detect market trends and trading moments is the Guppy Multiple Moving Average (GMMA).
What Is GMMA?
Guppy Multiple Moving Average helps in predicting the breakout point of the price of an asset class. Daryl Guppy (an equity trader and author) introduced the concept of the Multiple Moving Average. GMMA employs two different sets of Exponential Moving Averages (EMAs) with separate time periods to calculate upcoming changes in an asset’s price. One set of moving averages (MAs) is for the short-term and is fixed at intervals of 3,5,8,10,12,15. The second set of MAs is for the longer term and consists of 30,35,40,45,50,60. In total, there are 12 MAs.
On one hand, the GMMA Indicator provides a visual representation of these two sets of EMAs. The GMMA Indicator is the primary source from which the rest of the information is derived. On the other hand, the GMMA Oscillator denotes the relationship between the two sets of EMAs. The Guppy Count Back Line Indicator indicates volatility. Overcoming this volatility is necessary for detecting any changes in market trends.
What is GMMA MACD?
Another indicator called Moving Average Convergence Divergence (MACD) is used in association with GMMA to determine price movements. Traders use the GMMA MACD as a signal for buying/selling assets or to predict a bullish/bearish period.
(Source: Baby Pips)
GMMA Trading Rules
A Guppy trading strategy requires identifying changing trends and using trading management tools accordingly.
First, the gap that exists between a short-term EMA and a long-term EMA demonstrates the strength of the trend. If the distance between the two EMAs is significant, it suggests a strong trend. On the contrary, if the gap between the EMAs isn’t much, the trend is a weak one. In fact, the closer the two EMAs are to each other, the stronger the indication of a Consolidation period. In this phase, it is difficult to predict a breakout point and the price trend.
Second, once the short-term EMA intersects and crosses over or under the long-term EMA, it indicates a trend reversal. When the short-term EMA crosses the long-term EMA and continues to go up, it means a bullish trend reversal. However, if the short-term EMA goes below the long-term EMA, it indicates a bearish trend reversal.
Third, the GMMA Indicator helps to identify trading signals. If the short-term EMA goes above the long-term EMA, the trader should buy. On the contrary, if the short-term EMA goes below the long-term EMA, the trader must sell. When the two EMAs are moving sideways, traders must refrain from undertaking any trend trading. They might however engage in range trading during this period.
Fourth, uptrends and downtrends determine whether to enter into long trades or short trades. When the EMAs start separating again from the Consolidation period, and the short-term EMA crosses above long-term EMA, enter long trades. Contrarily, during a downtrend, traders must enter into short trades.
Why Use The Guppy Multiple Moving Average?
The Multiple Moving Average has its share of advantages. This is why traders use them to understand the trend strength of asset classes. GMMA helps in analyzing and predicting a trading environment and a future trend. It also helps to predict a price bubble or a fall in an uptrend. The Guppy Multiple Moving Average determines a trend breakout moment or continuation potential and predicts price weakness.
(Source: Trading View)
Drawbacks of Using GMMA
Traders use GMMA in innumerable instances to predict if they can earn a profit from a trade. However, in order to do this, they use past EMAs to predict the future trend. This makes Multiple Moving Average a lagging indicator or a late indicator. In real-world trading, this means that a trader might be too late to enter or exit a trade. All EMAs suffer from whipsaws and the asset price doesn’t change as predicted.
This is why all traders should use the Guppy Multiple Moving Average with some caution. Ideally, combining GMMA with other indicators like GMMA MACD might help make better predictions. Additionally, traders can refer to the Relative Strength Index (RSI) and corroborate the findings with other price charts and indicators. This will give traders a better idea as to whether a price trend is strong enough or will flip in the future.
Overall, GMMA is an extremely crucial indicator for all kinds of traders. But using it in the right way, traders are poised to make enormous profits from their trading activities.