For the moving average lovers, I think that it’s better to use GMMA than 1 or 2 moving averages. Let me know what you think!
Last night, I learnt about this ribbon moving average indicator here at Babypips.com. It is called Guppy Multiple Moving Average (GMMA) indicator. At first, I thought that it would be cloudy on my chart since it uses 12 moving averages. However, I found that it is clean and even very beautiful to look at.
Most importantly, I saw that it shows the trends and signals very clearly despite being a lagging indicator. So, I combined it with candlesticks readings and 3 indicators. I got great results…see for yourself!
NB: The photo looks smudgy after a screenshot. Trust me, it is very clear on the screen.
My own approach pretty much started from the GMMA many years back. I still only use MA’s for my trades and still have a short term v. long term band although I have mutated from those MA’s selected by Guppy into something rather different looking, but with the same principles intact.
The longer term band of MAs indicates the underlying longer term trend (or lack of!) whilst the short term band of MAs reflects the more current trend in prices and the intraday stuff.
You wrote “despite being a lagging indicator” which sounds quite negative! but, In fact, the value in this approach is BECAUSE it is a lagging indicator! Lagging is not “bad”, it just depends what you use it for.
In this case, the short term band will reflect the average value of recent trading compared with the average value of the more distant past. The difference between these is where you find the information. These two bands are either diverging or converging and indicate the relative direction as well as the relative strength/momentum of the near term price action with respect to the longer term price action.
The divergence/convergence of the short term band provides the signals for entry and re-entry but not always so hot as an exit tool, where it can be too slow.
In fact, one of the best stages with this approach is when the two bands superimpose, forming a compression state, i.e. a flat market. But eventually the short term band and price breaks out and indicates a new move starting.
Personally, I use this on dailies and 4-hour charts. I am not so confident that it is effective on shorter term charts.
I am not sure if I remember correctly but I think the Guppy MMA was introduced by Daryl Guppy about 10 years back in a book on trend trading. But it is worth remembering that it was primarily designed for trading stocks.
In forex terms, it is just one more method of identifying trends and is not anything magic. Without additional tools it is basically just an MA crossover system. However, I think it is a good one. But like all methods, sometimes it functions great and then other times it sucks. It is one of those systems that is easy to identify how it works when looking left on the chart from the current price, i.e. at what has been, but is not so easy to interpret and extrapolate when looking right from the current price at what might come next!
A good trend will be evidenced by a gap between the two bands and that is a good time to buy/sell into pullbacks into the gap.
I only really trade the USD, GBP, EUR combinations so cannot comment on other pairs. Stock indices also tend to function well.
The GMMA is not a method often mentioned on forums as far as I can see, and maybe that says something. But I find it useful within the scope of my own choice of EMAs for the bands and I combine it with an MACD (which I confess I tend to forget to look at).
I think this works well if one learns to read what the two bands are telling rather than just turn it into some kind of mechanical system.
I checked back through some older books and it seems the GMMA was first introduced in 1997, so it is a solid vintage method!
“Not all trends are created equal and Part IV, ‘Testing character’, includes an updated and complete discussion of the way the Guppy Multiple Moving Average (GMMA) indicator is used to assess a trend. The GMMA was introduced in “Trading Tactics” in 1997. Since then the indicator has evolved into more advanced and sophisticated applications. For many traders it has become the core way of understanding trend behaviour and indicating the type of trading opportunity. This part provides a detailed discussion of the trading and investment applications of the GMMA.”
I don’t know how widely used this approach is or variations of it but there are various websites for it and a number of Youtubes. But you may find that the choice of MAs is not the most suitable for forex and is worth experimenting with.
Thanks for an educational reply about GMMA. In addition. I’m glad to find a trader, who uses part of my strategy. This makes me feel that I am not alone. I hope that we can talk more about it someday. It’s also good to know that you have advanced from the GMMA bands to something more suitable for you. Bravo! I hope to see your remodelled indicator in future.
I thought about your statement that lagging isn’t a bad thing in trading. In a way, you are right. I think that it helps us wait for those quality trades. Yet, it isn’t easy to see a lagging indicator as a positive feature of trading. I think that most traders want to have a full cake. But a lagging indicator allows us to trade only parts of a trend. However, sometimes, lagging isn’t good at all. It makes an inexperienced trader miss a vital trade. I think that there isn’t any perfect strategy. A trader must combine components of what works very well to get the best out of a trade.
Reading your reply makes me want to research further about the best:
I don’t know what others are using it. My background has been trends and candlestick patterns. But yesterday, I used #1the GMMA indicator together with #2very few candlesticks patterns plus #3stochastic, OBV, and volume indicators. As you know that a candlestick pattern may be confirming a trend reversal, but the volume size may determine otherwise. #4 I mark my entry and exit points using the traditional resistance and support lines. I can afford to do all these things because I have a lot of time doing technical, fundamental, and sentiment analysis. I’m at home 24/7.
This negativity towards “lagging” is very common but it is generally only the result of it being one of those terms/ideas that all Newbies pick up as they all follow the same “learning” path and accept it as “true” and so start quoting it themselves and thus continue the myth ad infinitum.
If you think about it, there are only two things we can be sure of on a chart: a) where the price is now, b) where the price has been before.
If we only know the first one of these, where the price is right now, with no knowledge whatsoever of where it was earlier, then it tells us nothing at all and we have no idea where it might go next.
Therefore, everything we do on a chart has the same concept: a comparison and interpretation of where price is now v. where it was before.
A trendline looks for successive lower/higher lows/highs, a candle looks at where we opened/closed and high/low during a certain time period or periods, an S/R level just looks back to where we reversed before. Indicators like MACD, Stochastics, RSI, etc all place historic data into a formula and throw up an extrapolation for the likely future direction.
MAs are not uniquely lagging, they are just another, dynamic, way of comparing where we’ve come from with where we are now in order to project a probability forecast of where we might go next.
Some traders will criticise MA crossovers but then swear by MACDs and Stochastics etc which are pretty much the same principle. Other traders will criticise MA crossovers as a poor method for trade entry as it is lagging and misses part of the move, but will then praise trendlines as a better method even though most agree that a trendline needs three points to be valid - well, if you wait for three points on a daily chart before accepting a TL then you have also missed a big chunk of the move before getting in.
The core principle underlying all technical analysis is that price movement is not purely random (although on very short term charts it might seem so!) and that it will usually continue in a certain direction for a certain length of time. The problem is that the path is never smooth and price gyrates around the main path like a brand new puppy on a long lead out for its first walk. It wants to go in all directions at once because there is so much nearby that is so interesting! But you (the underlying fundamentals in the market) have a direction you are following and you just keep walking along the street and the puppy will just keep returning to your heels as you go.
Whatever TA method(s) we apply are designed to identify that street and its turning points. MA’s are just a different way of doing that, there is nothing negative in that. What they do provide, though, is some idea of the length of the puppy’s lead and how far it can deviate from the main path before getting snapped back into line - and the GMMA is quite good at that!
I will add one further thought to my above post on negativity about lagging indicators.
Perhaps the most successful, most followed and longest lasting thread on BP (and before BP) is the SW trading thread by Dennis. This a very simple structure that couldn’t really get simpler. It just compares the daily closing price with the daily closing price of the 4-hour 200-period SMA.
Now, a 200 SMA on a 4H chart means 200 candles, each of 4 hours duration. That is 800 hours of price. There are 120 trading hours in a week, so that is nearly seven weeks of input to that closing figure each day.
Yet there is no talk on that thread of how negative that SMA is or how late it gets us into the trades. In fact, its strength is that it only highlights a trend once it is established and most likely to continue. And this is point here: The value of any indicator lies in what it is designed to do, not in whether it is lagging or not. Whatever you use, you must understand what its purpose is and use it for that purpose. When you need a bucket use a bucket and when you need a sieve use a sieve…
“We use the Guppy Multiple Moving Average (GMMA) to define the character of the trend. This is much more useful than using just two moving averages because the GMMA captures the character of the trend and the relationship between two dominant forces in the market - the traders and the investors. The GMMA was introduced in Trading Tactics. Since then the indicator has remained the same, but the range and sophistication of its application to a variety of trading situations, markets and financial instruments have increased substantially.”
It is seriously worth remembering that the original application of the GMMA was designed for stock selection, looking for specific stocks showing signs of long term trending (upwards). This is what led me to review the MAs forming the two bands/ribbons for forex. In fact, it is not just two bands, the gap between the two bands is actually a third band and has a great role in re-entering decisions!
That is certainly nice to hear. It is a long time since I read Daryl’s book on trend trading and I feel inspired to go over it again. I will post here any points that seem interesting and worthwhile (assuming the thread-owner has no objections?).
“The traders always lead the change in trend. Their buying pushes up prices in anticipation of a trend change. The trend survives only if other buyers also come into the market. Strong trends are supported by long-term investors.”
Daryl Guppy on the logic behind the short term EMA selection:
“We track the traders’ inferred activity by using a group of short-term moving averages. These are 3-, 5-, 8-, 10-, 12- and l5-day exponentially calculated moving averages. We select this combination because three days is about half a trading week. Five days is one trading week. Eight days is about a week and a half.”
Personally, I don’t like this selection for my markets. I think any selection of short term EMAs between, say, 7-15 is better. Daryl uses the extreme short term EMAs to identify “bubbles” (or extremes) in stock price rises which I don’t really see in forex.
As he says, this band identifies the short term speculative traders. There are many trading models based solely on these short term MAs, especially MA crossovers, and it is of little surprise that they often fail because they take no account of the longer term investor trend underlying the move. Whipsaws are prevalent in the fast markets of the speculative moves, which these MAs lag behind even though they are short term MAs.
And here is Daryl Guppy’s reasoning for his long term, investor, EMA band:
"The investor takes more time to recognise the change in a trend but he always follows the lead set by traders. We track the investors’ inferred activity by using 30-, 35-, 40-, 45-, 50- and 60-day exponentially calculated moving averages. Each average is increased by one trading week. We jump two weeks from 50 to 60 days in the final series because we originally used the 6O-day average as a check point benchmark for the long-term trend. "
Again, I don’t use these as set here. I have always relied on both 20 and 50 EMAs for my trend identity and these are still the outside parameters of my long term band. I have also adopted a concept from NNFX and use my 50 EMA as my core “Baseline” and always watch which side of this the EMAs and price are floating.
Thats some good research on the indicator. I Myself work with USD, EUR, GBP or sometimes JPY. Never tried going beyond these currencies. I am yet to understand the practical approach to use this… Thank you for your opinion.
In a way, the function of the GMMA approach is very similar to using multiple timeframes. The long-term EMA band is a constant “reminder” of the underlying trend in the same way as watching a 4H chart over a 1H chart, for example.
The overall concept is based on the fact that trends do not evolve in a uniform manner, but have periods of stagnation and retracement as well as bursts of renewed enthusiasm. The short-term EMA band reacts to these various changes and shows us a picture of them unravelling against the background of the long-term band.
Superimposing these two stages on one chart brings the trend to life more than just two MAs, short and long, can do and reveals the character of the on-going trend as well as its exhaustion, demise and eventual reversal.
I’ve added here the recent 4-hour move on USDJPY just as an example. The circles show periods of compression between the two bands, which signify a balance between speculative and investor interests. These compressions are usually followed by a renewed take-off as either a trend continuation or a reversal. The renewed momentum is shown by the diverging lines in both bands and the periods of consolidation/retracement are shown by the converging lines and crossover of the short-term band.
This is quite a clear example, but other periods can be very confusing and muddled!!!