Introduction
In the world of stock trading, traders like to look for any signal they can to make the best out of whatever’s happening with their favorite stocks. Whether they should buy or sell, confirming the reliability of those decisions is something that any trader would like.
But how would they even go about doing that? The answer is indicators. Yes indicators. Each indicator you see out there seeks to provide some sort of insight into the market and this insight is something that you can use to get what you’re looking for.
Now while there are numerous indicators out there the one that we’ll be discussing today is known as the Guppy Multiple Moving Average or just GMMA if you can’t bother pronouncing all that.
What is GMMA (Guppy Multiple Moving Averages)?
So what is the GMMA even about? Well it’s a technical indicator that seeks to notify or expect when possible breakouts within the price of assets happen. It gets the name from Daryl Guppy who’s an Australian book author and financial columnist. He developed and introduced that concept first in his book called the Trading Tactics.
The Purpose of GMMA
The GMMA also incorporates another indicator we all know and love, the EMA(Exponential Moving Average) so that any differences between the stock’s value and price can be captured. A convergence within these factors is related to a substantial trend change. But Guppy does say that the GMMA isn’t exactly a lagging indicator but it’s more of a prior warning of an upcoming or developing alteration within value and price.
How is GMMA Calculated?
It doesn’t matter what platform you’re trading on, if it supports the GMMA then it calculates everything for you once you set those timeframes or tweak some other settings. But if you’re curious about how those platforms do the calculations then look no further as we’ll be discussing that below.
GMMA Formula
Now what the formula for the GMMA could be? It’s simple. It uses the EMA itself. What you have though really are short and long term groups of MAs, with each containing six MAs, making the total to 12. But, you can insert whatever periods you prefer obviously and this would be the N that you put into the calculation so that each of those MA values may be found.
So the formula for the EMA is this.
EMA = [Close price − EMAprevious] ∗ M + EMAprevious
While the formula for the Simple Moving Average or SMA that you can use as the first EMAprevious when you’re initially starting out with your calculation is this: SMA = Sum of N Closing Prices/N
Key Characteristics of GMMA
So from what we can deduce from that formula the key characteristics have to be the EMA itself, and the EMA from the previous period, the multiplier M that you can get by dividing two by N + 1, the SMA, and your number of periods obviously.
How to Use GMMA in Trading
Knowing the GMMA is one thing but actively using it in your trading is another and that can take some time to master. But don’t worry there are a couple of strategies or ways you can go about actually using it as we’ll look into below.
Trend Following with GMMA
Well, like with a lot of indicators these days you can use the GMMA in your trend following endeavors. Knowing when you have or are going to have a consistent rise in prices is vital in that you know that the time to buy is nigh if you haven’t already when the price was lower and if that consistent rise stops you’ll know that’s when you’re going to have to sell to prevent the price from dropping. If used properly trend following with the GMMA is something you could always benefit immensely from.
GMMA Crossovers
Like with any such indicator the potential for crossovers is there with this one too. Sometimes if you see the long term EMAs crossing with the short term ones then that could be a signal of sorts and you may want to be on the lookout for those if you want to make the most out of your trading.
GMMA and Trend Strength
What’s more you can even use the GMMA to gauge how strong a trend really is as that will show you how long it may really stay like that for. But how can you determine that? Well you’ll have to look for the amount of separation between the long and short term MAs. If they’re widely separated then that could confirm the strength of prevailing trend in that it’s strong. On the other hand if you have narrow separation or crisscrossing lines then that could instead imply a consolation period or a weakening trend.
GMMA and Trend Reversals
Previously we went over crossovers between long and short term MAs and that they could represent something significant and that something is a trend reversal. If you see the short term MA crossing over the longer ones then you have a bullish reversal on your hands. But if those shorter ones cross below the longer ones then there’s a bearish reversal happening.
GMMA Strategies for Different Trading Styles
Now let’s see how GMMA can fit with some of the more popular trading styles that you see being adopted within the landscape lately.
Day Trading with GMMA
If day trading is something you find considerably appealing then you could always tweak the settings for the GMMA to fit that. You could start by shortening those time frames to reflect the short term gains you’re looking for and as for a specific trading strategy something like scalping or trend following may be what you’re looking for or might want to do.
Swing Trading with GMMA
But if you’re a swing trader and it’s those medium to long term gains that you find most appealing then you can adjust those time frames accordingly to incorporate those goals. Secondly with the extra amount of time that swing traders usually have relative to day trading they could benefit more from strategies that involve crossovers.
Long-Term Investing with GMMA
If it’s the long term that’s more up your alley of trading then you’d naturally want your time frames with this indicator to be longer. You could also make use of divergences and crossovers and trend following more too.
Advantages and Limitations of GMMA
No matter what indicator you end up using knowing your way around its limitations can be tremendously helpful as that way you’ll learn how to mitigate them and have a better time trading with the stocks you like. So without further ado let’s get into it.
Benefits of Using GMMA
Let’s start with the benefits first. It can be a reliable tool in your arsenal to follow trends and we all know how important that can be in stock trading. Secondly it can also help with confirming how strong those trends really are and that’s just an added bonus really as that means that your trading decisions may have that much more weight behind them.
Limitations of GMMA
Despite what Guppy would have you believe the main limitation of this indicator is that it’s a lagging one. Yes as each EMA shows you the average price in the past. It cannot exactly predict the future and that brings us to the next point. The potential for false signals is still there and there’s also how it may not work all that well within flat or choppy markets. Lastly it can be a bit complex to fully get a hang of it do keep that in mind if you’re looking into using this.
Conclusion
The Guppy Multiple Moving Average or GMMA has stood out as a comprehensive tool that traders may use, especially those who want to understand both the long and short term market sentiments. The layered approach with those dual EMA sets may provide some deep insights after all, like a potential reversal or how strong the trend is, and this could make it a formidable tool in your trading arsenal.
But like any other tool, how effective it can be depends on your really or how much of a expert you are in stocks. Also you might want to factor in its limitations too like the fact that it’s a lagging indicator if you are to make the most of it.
What is the difference between GMMA and traditional moving averages?
The main difference is that the GMMA incorporates sets of MAs instead of a single MA or line on the graph.
What is the best time frame for using GMMA?
The best time frame depends on your trading style. Day traders tend to like shorter frames whereas swing and long term trades like to see longer ones in their charts.
Can GMMA be used for all asset classes?
Technically it could but it wouldn’t do much good with assets that barely have any price action and that’s like an inherent trait of theirs not just a temporary phase like it is with others.
How can I avoid false signals with GMMA?
The best and most reliable way is to just use other indicators alongside it. Like the RSI for example.
Is GMMA suitable for all market conditions?
Not really, like if there’s too much volatility then the potential for false signals increases due to that extra noise and that’s where you’ll really see some of its shortcomings coming to light.