Having difficulties with trend trading? Well, I got one of the popular trend-trading strategies for you. It’s called the Guppy Moving Average.
What is the Guppy Moving Average?
The Guppy Moving Average (GMA) was a trading system developed by Australian trader Daryl Guppy. He used a unique combination of multiple moving averages to provide a comprehensive view of market trends to spot shifts as well as identify potential bounces and reversals. Before we dive deep into the GMA, let’s talk about moving averages.
Understanding Moving Averages
Moving averages are statistical indicators that smooth out prices by calculating the average price over a specified period. It is commonly represented as a line on a chart reflecting the average value of a security over a given period. There are different types of moving averages, but the two most commonly used moving averages are the:
- Simple moving average (SMA)
- Exponential moving average (EMA)
The Simple Moving Average uses a mean calculation for the entire period being used for the SMA. It uses equal weight for each data point when getting the SMA. The EMA, however, places more weight on the most recent data, which makes it more responsive to price changes.
The formula for SMA:
The formula for EMA:
The Guppy Moving Average Components
Daryll Guppy’s GMA uses a unique combination of different periods of 12 moving averages that can be divided into two groups. The short-term group of EMAs is composed of 3, 5, 8, 10, 12, and 15 periods. Then the long-term group includes another six EMA periods of 30, 35, 40, 45, 50, and 60. The GMAs give traders a clearer picture of short-term price movements and long-term trends from their components. Therefore offering a comprehensive view of market dynamics and enables traders easily find potential entry and exit points.
Interpreting Guppy Moving Average Signals
The Guppy Moving Average provides traders signals based on the interaction between the 2 groups of GMAs. When its short-term GMAs are above its long-term GMAs, it’s a bullish signal and suggests that the market is currently in an uptrend. Similarly, when reversed, it signals that the security is currently in a downtrend.
The indicators also provide insights into market volatility. When there is low volatility, the short-term GMAs are tightly grouped and are currently in a consolidation phase. On the other hand, when the short-term GMAs are widely spaced or start to widen, it suggests that the market is starting to get volatile or is currently in high volatility. This can help indicate potential trend reversals or strong price movements.
Guppy Moving Average applications
There are several ways that the Guppy Moving Average can be applied. May it be short-term trading or entries for long-term investing. Its flexibility provides its users with a comprehensive tool for navigating the markets. For example:
One of the Guppy Moving Averages’ strengths is its ability to easily identify trends in the market. By simply looking at how the short-term and long-term GMAs interact with each other and their positions, traders can easily determine whether the market is in an uptrend, downtrend, or moving sideways.
Finding entry and exit points
Traders can also use the Guppy Moving Average to identify potential entry and exit points. For example, when the short-term GMAs cross above the long-term GMAs, it is seen as a buy signal that is indicating a potential buying opportunity. Conversely, a bearish signal occurs when the short-term GMAs cross below the long-term GMAs, telling the traders that a potential shorting opportunity is available or the trend may reverse.
Scaling additional positions
Another unique application of the Guppy Moving average is how it provides a visual cue on the interaction price with the moving average. The GMA provides “bouncing off” areas when a price is in an uptrend, and the price suddenly drops, and the bounces on the short-term moving average like a trampoline. You can see how this propels it higher and continue with the trend. This creates opportunities to add to a trader’s position or take advantage of an existing trend.
Limitations and Considerations
While the Guppy Moving Average provides a comprehensive analysis of the trend and can provide profitable signals, it, too, has its limitations. Prices will move based on how traders and investors interpret data, market cycle, sentiment, etc. Traders and investors need to understand these limitations so they know when they should apply the GMA. Since moving averages are using historical data, their dependency on closed prices makes signals delayed. In addition, it also does not take into consideration company financials, estimates, market conditions, and others.
It’s no doubt that the Guppy Moving Average is widely accepted as a powerful tool that both traders and investors can use to take advantage of market trends and other potential opportunities that the markets provide. However, it is important to understand and consider its limitations. Buying and selling signals are just one side of a good trading strategy. Stock selection, risk management, and trade management are also important components of a good strategy. Traders should also look at other factors like volume, company financials, the health of the business, etc., while having proper risk management for a holistic investing and trading strategy.