Technical Classroom: How to use Guppy Multiple Moving Average to devise a trading strategy

These twelve moving averages are all plotted on a chart where traders can look at fractal repetitions.

Working of GMMA

The relationship within each of these moving averages groups indicate following points.

• When there is agreement on value
• When they are close together
• When there is disagreement on value
• When they are well spaced apart
• When both groups compress at the same time it alerts the trader to increased price volatility and the potential for good trading opportunities.
• The degree of separation in the long term group defines trend strength and weakness.
• The degree of separation in the short term group defines the nature of trading activity.
• The degree and nature of separation between the two groups of moving averages define the character of the trend.
• One has to trade in the direction of the long term group of averages
• One should not use it as a simple moving average crossover tool.

Advantages

• GMMA enables effective analysis of the trending environment
• It gives a better understanding of strength of the trend.
• It gives effective evaluation of unusual price movements, such as dips and spikes
• It follows ‘Trend is the best friend’ principle of trading.

Disadvantages

• GMMA is not effectively applied to trend less or consolidating stocks.
• One need to follow trading system of GMMA entirely rather using it just like another indicator.

Trading Technique:

GMMA Crossover

The simplest method for using the Guppy Multiple Moving Average indicator is to trade a basic moving average crossover system using all twelve of the GMMA EMAs. This system would buy when all of the short-term EMAs cross above all of the long-term EMAs, and sell when the short term EMAs cross below the long-term EMAs. Figure .3.GMMA Crossover Buy & Sell Signals

GMMA Laddering Trading Technique

A change in price direction that is well supported by both short and long term investors signals a strong trading opportunity. It can be applied to both long side and short side. It can be applied to intraday trading as well as for longer term investment style analysis.

Laddering trading technique is simply adding position at every support taken by short group near or around long group of moving averages. It follows simply ‘Trend is my friend’ principle and helps in following the main trend. Add long position whenever short moving averages group gives bullish crossover within its all moving averages whenever it is near or inside long group while long group is rising and in buy mode. It can be used in both uptrend as well as downtrend; however it is more useful while adding long position in portfolios. This technique is used by many portfolio managers worldwide.

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) or Stochastic to confirm signals. Figure .4.GMMA Indicator Ladder Signals

Laddering is most useful for trend trading on daily time frame.

Conclusion

• Guppy groups the EMAs into two categories. The first six are considered short-term and the other six are considered long-term. The short-term EMAs used are 3, 5, 8, 10, 12, and 18. The long-term EMAs used are 30, 35, 40, 45, 50, and 60.
• Together with Guppy, price action, and heikin-ashi charts can help traders identify and capture trending markets.

The author is Head - Technical & Derivative Research at Narnolia Financial Advisors.

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