The Guppy Multiple Moving Average

By Daryl Guppy 2004
Director www.guppytraders.com
Author Market Trading Tactics, Better Stock Trading, Trend Trading

The Guppy Multiple Moving Average (GMMA) indicator tool is based on the relationships between groups of moving averages. Each group of averages in the GMMA provides insight into the behavior of the two dominant groups in the market - traders and investors. The indicator allows the trader to understand the market relationships shown in the chart and so select the most appropriate trading methodology and the best tools. The GMMA is designed to understand the nature of trend activity on an end of day, or intraday basis.

The GMMA indicators is packaged with Metastock as a template, and included as a plug-in with OmniTrader. It is a feature of many other charting programs, including NextView, Traders Essentials, Ezy Charts, Incredible charts and others.

The inferred activity of traders is tracked by using a group of short term moving averages. The traders always lead the change in trend. Their buying pushes up prices in anticipation of a trend change. Their activity is shown by a 3, 5, 8, 10, 12 and 15 day group of exponentially calculated moving averages.

The trend survives only if other buyers also come into the market. Strong trends are supported by long term investors. The investor takes more time to recognize the change in a trend but he always follows the lead set by traders. We track the investors' inferred activity by using a group of long term moving averages. This group is 30, 35, 40, 45, 50 and 60 day exponentially calculated moving averages.

The GMMA is used in six trading situations

CLASSIC TREND BREAKS

The chart shows the classic application of the GMMA. We start with the breakout above the straight edge trend line. The vertical line shows the decision point on the day of the breakout. We need to be sure this breakout is for real and likely to continue upwards. After several months in a downtrend the initial breakout sometimes fails and develops as shown by the thick black line.

The GMMA is used to assess the probability the trend break shown by the straight edge trend line is genuine. We start by observing the activity of the short term group. This tells us what traders are thinking. In area A we see a compression of the averages. This suggests traders have reached an agreement on price and value. The only way to take advantage of this 'cheap' price is to buy stock. Unfortunately many other short term traders have reached the same conclusion. Traders who believe they are missing out on the opportunity outbid their competitors to ensure they get a position in the stock at favorable prices.

The compression of these averages shows agreement about price and value. The expansion of the group shows traders are excited about future prospects of increased value even though prices are still rising. These traders buy in anticipation of a trend change. They are probing for a trend change. We want confirmation the long term investors are also buying this confidence.

The long term group of averages at the decision point show signs of compression and the beginning of a change in direction. Notice how quickly the compression starts and the decisive change in direction. This is despite the longest average of 60 days which we would normally expect to lag well behind any trend change. This compression and change in direction tells us there is an increased probability the change in trend direction is for real and sustainable. This encourages us to buy the stock soon after the decision point shown.

This compression and eventual crossover within the long term group takes place in area B. The trend change is confirmed. The agreement amongst investors about price and value cannot last because where there is agreement some people see opportunity. Many investors missed out on joining the trend change prior to area B and now the change is confirmed, they want to get part of the action. Generally investors move larger funds than traders so their activity in the market has a larger impact.

The latecomers can only buy stock if they outbid their competitors. The stronger the initial trend, the more pressure to get an early position. This increased bidding supports the trend and is shown by the way the long term group continues to move up, and by the way the long term group of averages separates. The wider the spread the more powerful the underlying trend.

Even traders retain faith in this trend change. The sell-off in area C is not very strong. The group of short term averages dips towards the long term group and then bounces away quickly. The long term group of averages shows investors take this opportunity to buy stock at temporarily weakened prices. Although the long term group falters at this point, the degree of separation remains relatively constant, confirming the strength of the emerging trend.

The GMMA identifies a significant change in the market's opinion about the stock. The compression of the short term and long term groups validates the trend break signal generated by a close above the straight edge trend line. Using this basic application of the GMMA, the trader has the confidence necessary to buy at, or just after the decision points shown on the chart extract. The GMMA allows the trader to understand the nature and character of the trend. Armed with this knowledge we select the most effective trading tools for each situation.

The variety of GMMA applications is more fully discussed in Trend Trading. This also includes applications of intraday trading using minute settings rather than days. It also examines the use of GMMA Divergence and Oscillator analysis. Metastock formulas for these applications are available from www.guppytraders.com

Daryl Guppy is a full time trader and author of Trend Trading, Trading Tactics and Better Trading. He runs trading workshops in Australia, Asia, China and the US. He can be contacted via www.guppytraders.com.