2025.03.05
2025.03.05
Guppy Multiple Moving Average (GMMA): Formulas & Trading Strategies
Maxim Tkachenkohttps://www.litefinance.org/blog/authors/maxim-tkachenko/
The Guppy Multiple Moving Average (GMMA) is one of the simplest and easily combinable indicators. You definitely should read this article before building your trading strategy. You will get solid knowledge that you can use in any market, applying it to any trading instrument ranging from currency pairs to digital assets. You will also discover how the GMMA indicator functions and how to fine-tune it to gain maximum profits.
The article covers the following subjects:
Major Takeaways
- The Guppy Multiple Moving Average (GMMA) indicator consists of twelve moving averages divided into two groups. The short-term group represents traders who prefer to use lower time frames, while the long-term group represents traders or investors who choose higher time frames.
- The GMMA is the best technical indicator for identifying a trend’s direction, determining its strength, and indicating reversal points.
- If all the lines of the short-term group are higher than those of the long-term group, a trend is bullish. Otherwise, a bearish trend is present.
- The more the lines of the long-term group diverge, the stronger the price trend. If the lines of the long-term group are intertwined with the lines of the short-term group, there is no distinct trend. It means that it is better to trade with Guppy Multiple Moving Average strategy, adding other technical analysis tools to the chart.
- If the price or the lines of the short-term group break through all the lines of the long-term group, the trend is most likely ended. Therefore, a shift in market sentiment or consolidation is imminent.
- GMMA combines perfectly with indicators such as the RSI to detect reversals and the TTM Squeeze to identify periods of consolidation and low volatility.
What Is the Guppy Multiple Moving Average (GMMA)?
GMMA is a fairly easy to grasp and well designed basic trend indicator that helps traders assess the direction of the market trend. It was created by Australian financial columnist Daryl Guppy. The author explained that the underlying concept was to take into account the two major groups of market participants. After all, it can be difficult to define a trend as a directional price movement depends on market context. An asset’s price may be trending down on a 15-minute chart, while on a daily chart, this decline may look like a minor correction within a primary bullish trend.
The Guppy Multiple Moving Average is exactly what gives us the opportunity to consider both long-term and intraday traders’ actions. The GMMA is one of the best indicators for determining the current trend.
On a price chart, it is displayed as two groups of moving averages (EMAs), with six lines in each group. The blue lines reflect short-term traders’ actions, and the red lines show long-term investors’ impact. The red lines can be used as dynamic support and resistance levels.
How to Calculate the GMMA
The Guppy Multiple Moving Averages (GMMA) indicator’s name clears up the mystery behind its design. The name says that it employs the most common Exponential Moving Averages (EMA) with different averaging periods.
The GMMA uses the following formula to calculate the Exponential Moving Average:
EMA = (Closing Price – EMA Previous) х Multiplier + EMA Previous.
Since the GMMA consists of 12 EMAs, the multiplier will change 12 times to build the Guppy Multiple Moving Average indicator. To calculate the GMMA, you should build two groups of short-term and long-term EMAs. A group of blue short-term MAs capture the spontaneous reactions of short-term traders, and to plot them on the chart, the default periods of 3, 5, 8, 10, 12, and 15 are applied. For the group of red long-term MAs, reflecting strategic moves of long-term investors, the default periods are 30, 35, 40, 40, 45, 50, and 60. Notably, the step is between 2 and 3 for the short-term group, while for the long-term group, the step varies from 5 to 10.
How to Set Up the Guppy Multiple Moving Average
Setting up the GMMA indicator is relatively simple. You can download it on the MetaTrader 5 market. It is available absolutely free of charge. For example, I have the version by Yuto Tokuhara.
In the settings, you can select the color of the lines according to your preference.
How to Use the Guppy Multiple Moving Average
Since the Guppy Multiple Moving Average is a trend-following indicator, you should use it for trend trading. If you trade using this tool when the market is flat, you will suffer losses. The trend has three parameters:
- Direction.
- Strength.
- Reversal.
How to Determine Trend Direction Using GMMA
The GMMA indicator can help identify a trend direction in a quite straightforward way. When the blue short-term group of EMAs is above the red long-term group, the trend is bullish. Conversely, when the blue group of EMAs is below the red EMAs, the trend is bearish.
How to Determine Trend Strength Using GMMA
The strength of the trend can be determined by a degree of separation between short- and long-term MAs. The wider the red MAs separate, the stronger the prevailing trend. If the blue MAs also move away from each other, it confirms that the trend is strong. I would recommend you to focus on the red lines. If they are quite widely separated, it will be hard for the price to pierce all of them to reverse the main trend. At the same time, the blue MAs are very sensitive to changes in quotes, and the price can breach them quite easily, even if they have drifted apart a lot. Accordingly, if the MAs crisscross, the trend weakens.
How to Identify Trend Reversals Using GMMA
A trend reversal is confirmed when all blue MAs cross all red MAs. Consequently, if the blue MAs pierce the red MAs from above, it suggests a bearish reversal. Conversely, if the intersection occurs from below, a bullish reversal signal is provided by the GMMA.
In addition, it is important to monitor the long-term moving averages and trading volume. If the short-term moving averages begin to expand significantly after breaking through the long-term moving averages, and the latter start to narrow, while trading volume is increasing, there is a high probability of a change in trend direction. If the short-term group continues to flatten or even expand, it is likely that there will be a mere correction.
Traders often use the GMMA indicator in conjunction with the relative strength index (RSI). When the market is overheated or exhibits a bearish divergence, the probability of a bearish reversal increases. Conversely, if the market is oversold and a bullish divergence is observed, the likelihood of a bullish reversal is high.
Trading Strategies Using the Guppy Multiple Moving Average (GMMA)
Let’s apply this knowledge to a practical scenario, exploring how you can trade using multiple moving averages and the tools of technical analysis that can enhance your trading results. Starting with simple classical strategies, we will advance to refined strategies that I have personally optimized. We will take the Ethereum cryptocurrency against the Tether stablecoin (ETHUSDT).
Breakout Strategy
In my professional opinion, this approach stands out as an unconventional strategy for a trend-following lagging indicator, as it involves navigating the market in the absence of a prevailing trend. There is a more suitable and highly effective TTM Squeeze indicator that is particularly well-suited for this strategy.
However, this strategy exists, I will proceed to explain its mechanics and implications.
When the short-term and long-term moving averages intersect, indicating a lack of trend, the market enters a phase of uncertainty, and you place pending orders above each higher high and lower low. As the price remains range-bound, you adjust your pending orders, gradually moving them further towards the anticipated trend. Eventually, these orders are executed, marking the start of a new trend.
If you are unfamiliar with the Smart Money concept, you can identify moments when some of the blue MAs break through the red ones and move back. These can be used as higher highs. Alternatively, you can add Bill Williams’ Fractals indicator to identify extrema.
The strategy shows the GMMA as unsuitable due to the high probability of false breakouts that often lead to losing trades.
Trend-Following Strategy
In general, this is exactly the strategy for which the GMMA indicator was created. The trend-following strategy is the simplest and most reliable trading system for this trading tool. Moreover, it can be applied to Forex trading and any trading assets such as crypto, stocks, and commodities.
The strategy is straightforward. However, there are three conditions that need to be met to ensure profitable market entries:
- The trend persists. The blue MAs are trending above the red MAs.
- The price starts a correction, entering the area of red MAs.
- The price leaves the zone of red MAs, and the candlestick closes above all red MAs.
When all the conditions for entering the market are met, you can open a trade, placing a stop-loss order below the lower shadow of the corrective candlestick.
There are other validating conditions. For example, if the red MAs are very extended at the beginning of the correction, it indicates a strong trend movement.
There are two ways to exit the market:
- You can focus on the risk/reward ratio that your risk management dictates. For example, in my ETHUSDT backtest, I used a risk/reward ratio of 2. This means that the distance between my take-profit order and the entry point is twice the stop-loss distance.
- You can keep your trade open until the blue MAs cross the red ones in the opposite direction, implying the end of the trend. Here is how the trading chart would look.
These are two solid trading strategies that use the Guppy Moving Averages indicator in the crypto market. However, you should backtest these strategies on the quote history of a particular asset to determine which one works best for you.
Crossover Trading Strategy
The GMMA crossover strategy is the most profitable one when trading with the GMMA indicator because it offers a high risk/reward ratio. In volatile markets, such as cryptocurrencies, you can even use a ratio of 3. This allows you to earn a profit even if only 40% of your trades are winning!
So, let me tell you what it looks like, and then we will figure out how to improve this strategy.
The strategy is fairly straightforward: if all blue MAs cross all red MAs from below, the indicator generates a buy signal. Conversely, if the blue MAs cross the red MAs from above, the GMMA gives a sell signal. However, if the price moves sideways, there is a risk of false signals. To mitigate false signals, we should introduce an additional condition: the blue moving averages should expand.
In other words, when a candlestick closes, all blue lines should be higher than all red lines, and the distance between the blue MAs should increase. This indicates an intensifying trend and suggests that the recent breakout is likely not a false signal, but rather the beginning of a new trend. In essence, we observe a breakout of the previous trend and the emergence of a new one.
A stop-loss order can be placed at the high of the first candlestick that breached the red MAs.
While there will always be false entry points, the significant risk/reward ratio enables you to gain profits even without any customizations. Nevertheless, we will implement breakout confirmations as an initial improvement to this strategy.
Crossover Trading Strategy with Confirmations
This strategy offers one of the easiest ways to ascertain whether the asset’s price has started a new trend.
Imagine that the price has pierced the red MAs from above but failed to settle below them, only retesting these lines and rebounding to the upside. This scenario implies that when bears were opening short positions, trying to push the price lower, bulls opened a large bulk of long trades, outperforming the opposing market force. Against such a powerful upward impulse, it would be advantageous to join bulls in their attempt to drive the asset’s price higher.
Meanwhile, if the price retests the red lines on increased trading volume, the signal generated by the indicator is amplified. Once such a candlestick closes, you can enter the market, setting a stop-loss order below the lowest red line.
Entering the market on such retests, you can reduce the risk of false signals and greatly increase the risk/profit ratio, as stop-loss orders can be placed at a short distance. You can move your stop-loss order along the red line until the price triggers it, and the risk/profit ratio can be more than 5 during strong trends! That’s quite a huge profit potential. However, there is more to it than that.
Crossover Trading Strategy with Confirmations Using Fibonacci Levels
When it comes to improving trading strategies, the sky’s the limit. We can identify entry points when a new trend emerges even more precisely by employing the Fibonacci indicator. This technical analysis tool shows corrections within an impulsive price movement. As you may know, real breakouts, whether a trend change or an exit from a sideways channel, always occur in the form of an impulse.
As a rule, when the market becomes overheated, the price usually cools down and corrects to the range of 0.5 to 0.618 according to the Fibonacci retracement. The price most often retests this area. Once the price hits this area, we can open a position. Furthermore, the Fibonacci retracement is most effective when applied to stable assets, such as stocks, rather than high-risk instruments like cryptocurrencies.
The Fibonacci indicator can be used to further refine the trading strategy, facilitating more precise and profitable market entries. Had we entered the market in the above mentioned range, maintaining the exit strategy of moving the stop-loss order along the red lowest MA, we would have increased the risk/return ratio to as high as 6.11!
Crossover Trading Strategy with Confirmations and RSI
Let’s continue to fine-tune our trading strategy by adding the RSI. I use the RSI Divergence Indicator, which is available for free in the MetaTrader 5 market.
We will identify potential market entry points by monitoring the RSI indicator for trend reversal signals, such as when the indicator is above 70 or below 30, pointing to an overbought or oversold market condition respectively. Our focus will be on divergences in overbought or oversold zones, as the market may exhibit an impulsive movement in these areas.
For those who prefer a more assertive approach, it may be advantageous to enter the market when the price performs a reversal impulse. However, this strategy is not recommended for novice traders. Instead, it is better to wait for the price to enter a correction area. Open a trade when the price starts to exit this area. Notably, the price should exit the correction zone after entering it.
In this scenario, you can place a stop-loss order above or below the candlestick’s extremum, the one which marks the beginning of an exit from the correction zone. After that, you can move your stop-loss order along the farthest red moving average.
You can exit the market when the RSI indicator shifts to the opposite zone. In our case, it moved from the overbought zone to the oversold zone, indicating the opportunity to close the position safely. When implementing this strategy with highly volatile assets, you can achieve a risk/return ratio of over 7 and, in some cases, even more than 10.
Advantages and Limitations of the GMMA
The GMMA indicator is highly effective for trend trading. However, despite all the advantages this trading tool offers, its drawbacks should also be considered.
Advantages
- Easy to interpret and use.
- Performs well with trend-following strategies.
- Combines smoothly with other technical indicators.
- Shows high performance in conjunction with other indicators.
Limitations
- Uses moving averages, which are lagging by nature.
- Generates a lot of false signals when there is no pronounced trend.
- A stop-loss distance is very large when used as a standalone indicator.
GMMA vs. EMA
The GMMA indicator represents a combination of 12 EMAs with different periods, so there are many similarities between the Guppy indicator and Exponential Moving Averages. However, there are some nuances to pay attention to.
A simple EMA is typically used to determine the general trend. To do this, a specific round value is selected, such as 30, 50, 100, or even 200. However, the EMA represents just one line on the chart, which can hardly be used as a dynamic support or resistance level. Each trader customizes their EMA to suit their strategy. In this connection, when you expect the price to reverse upon reaching your EMA, acting as a dynamic support level, on the chart, other traders may have their EMAs moving in other areas or have no EMAs at all. As a result, the market may not rebound from your support level, as the EMA settings may not fit the market conditions.
Guppy moving averages offer a more advanced strategy, incorporating two areas on the chart to identify trends better. If the price breaks through the short-term group of MAs, it indicates a correction within a prevailing trend. Therefore, you can open a position when the price rebounds from the long-term group of MAs.
In addition, the EMA provides little information about a trend’s strength. When the price moves significantly away from the EMA, a trend can be considered strong. However, it remains challenging to discern whether the trend is weakening or gaining traction. In this regard, the GMMA emerges as a more functional and informative indicator.
Conclusion
You are now familiar with the Guppy Multiple Moving Average (GMMA) technical indicator. You use the recommended trading strategy or add your favorite indicators to it to generate hefty profits, even if you are a beginner. This strategy allows you to make mistakes in trading and learn from them, offering a relatively high risk/reward ratio.
Guppy Multiple Moving Average FAQs
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
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