What is the GMMA indicator? Why is the GMMA important in trade coins?
What is the GMMA?
The Guppy Multiple Moving Average (GMMA) is an indicator used to identify market trends to find out trading opportunities by combining two groups of moving averages (MA) in various time periods. This indicator gets its name from an Australian trader, Daryl Guppy. There are 6 long-term MA and also 6 short-term MA, which makes it 12 in total.
The basis of GMMA
- Guppy Multiple Moving Average (GMMA) is applied as an asset price chart overlay.
- Short-term MAs are 3, 5, 8, 10, 12, 15. Long-term MAs are 30, 35, 40, 45, 50 and 60.
- Short-term average crossing over the long-term average often suggests a possible uptrend of the asset.
- Short-term average crossing below the long-term on the opposite suggests a possible downtrend of the asset.
- If short-term MA is shrinking too quickly while long-term MA is still expanding, there can be either a drastic up or down in price ahead.
- If there were to be an intersection of the two MAs, it’s very likely that the current price trend has gone into stagnation and about take a turn.
- Traders mainly use long-term MA to identify the trend and short-term MA to sell or buy signals.
GMMA indicator formulas
Guppy indicators can either utilize SMA or EMA. EMA is far more often used. There are 12 moving averages.
EMA= [closed price – EMA previous] *M+EMA previous
SMA=(∑the closed price of N)/N
EMA = exponential moving average
EMA previous = previous EMA average
(EMA previous can be replaced with SMA in the first equation)
N: MA average cycle (ex: 5 days, 15 days, 10 hours,…)
M = 2/(N+1)
SMA = simple moving average
How to calculate GMMA?
There are 12 exponential moving averages in the Guppy indicator. Repeat the steps below for each of the moving averages you want to calculate. Input the value of N to calculate the EMA you want. For example, use N = 3 to calculate the 3-period average and use N = 60 to calculate the 60-period EMA.
- Calculate SMA for the first cycle (ex: 3 cycles, N=3).
- Calculate the M multiplier using the same N value used to calculate SMA.
- Use the most recent closing prices, together with multiplier M and SMA to calculate EMA. EMAprevious can be replaced with SMA in the first equation. Once the EMA has been calculated, the SMA line is no longer necessary, as this EMA is the same as that used to replace SMA in the first step.
- Repeat the same procedure for the next N value, until you have all 12 EMAs for 12 cycles.
What does GMMA tell you?
GMMA can identify trends changes or assess the strength of current trends.
The distance between the short-term and long-term moving averages can suggest the extent to which trend is evolving. The larger the distance, the more aggressive the trend is. The narrower distance, or if the lines intersect each other, the frailer the trend or it could be just sideways period.
The intersection of the short and long term moving averages represents a chance of trend reversal. If the short-term crosses above the long-term upwards, then a bullish reversal is occurring. If the short-term MAs surpass the long-term MAs from downwards, a bearish reversal is occurring.
When both MA groups are moving horizontally, or mainly moving sideways while heavily intertwining, prices will be in a sideways state, thus the present market is not spend-friendly for trend followers. These periods can be good for short-term transactions, like a day or a few hours.
Indicators can also be used to identify buy and sell signals. When the short-term crosses above the long-term MA from the bottom and upwards, insert buy entries. When the short-term crosses over the long-term group from the top and downwards, insert the sell entries. These signals should be avoided when prices and MAs are moving sideways (sideways market situation). When the MAs start diverging, it is very likely a new trend is forming (either an uptrend or downtrend). In a solid uptrend, when the short-term MAs crosses above the long-term MAs and then gradually layover long-term MAs, traders should enter sell order since there an incoming uptrend. The same thing applied to downtrend.
Traders should use GMMA in combination with other indicators to maximize their success rate. For example, you can look at the Relative Strength Index (RSI) to see whether a trend is peaking (with overbought, oversold) and ready for a price reversal, or utilize different candlestick chart patterns to identify different entry or exit points after the MA lines in the GMMA indicator intersected.
The difference between GMMA and EMA
GMMA consists of 12 EMAs, so basically GMMA and EMA are the same. GMMA is a set of EMAs that creators trusted to help isolate transactions, uncover opportunities and alert price reversals. Using various Guppy MA lines other than just using one or two EMA help traders to see strengths or weaknesses in a trend. (Through our trade experience, we realized that the EMA responds well to a longer cycle, so will the GMMA indicator.)
Limitations of using GMMA
The major limitation of Guppy and EMA is that they are both late indicators. Each EMA represents the average price from the past. Sometimes, waiting for the MA to tick may cause you to buy late or exit late, because the price has moved so strongly that the new GMMA indicator gives an entry signal. All moving averages are also susceptible to noise. This is when there is a crossover, showing the possibility of a trade, but the price does not move as expected and then the moving averages once again intersect which will lead to a loss.