Trend traders, heads up! This indicator is for you. The indicator that we are looking at is known as the Guppy Multiple Moving Average or GMMA (Guppy) for short.
This indicator is meant to not only identify which way the market is trending but also to help traders spot when that trend may be about to start. If a trader can identify a trend as it is just beginning and get in on it, then they stand to potentially profit quite handsomely from their trading.
However, this takes great tact and skill, and probably a little help from the GMMA indicator to boot.
The Guppy indicator seeks to take multiple moving average ribbons and lay them all out on the same chart.
Comparing the ribbons against one another may help a trader identify when a trend is changing direction, and at which price points they ought to try to get in on the trade. It is especially important that traders have the ability to spot these types of trends and that they have the flexibility to get in on them as soon as they identify them.
The sooner a trader can capitalize on the change in trend, the better their odds are of making some money on that movement.
Here’s what it looks like:
The Start of Guppy Indicator
The Guppy indicator was created by a man named Daryl Guppy. He was an Australian trader who wanted to see how to use various moving average ribbons against one another to find when and how various trends started to form. It was his firm belief that if he could make an indicator that could be used by people who were in the business of spotting trends, then he could develop something that people would get genuine use out of, and he would be lauded as a hero to the traders who found great benefits in his work. He was right on that account.
When using the Guppy indicator, traders will see how a total of 12 EMAs (the moving average ribbon) move in tandem or against one another. This is meant to help traders see the strength or weakness of a particular trend much more clearly than if they were only using two EMAs pitting against one another. The additional 10 EMAs that the Guppy indicator deploys add some colour and detail to the overall picture of what we are looking at here.
The EMAs in this indicator are divided into two groups for review:
- Short-term EMAs
- Long-term EMAs
You need both of these to see how the trend compares against itself over the short and long term. If the short term EMAs start to cross over the long-term EMAs (in either direction), then we may be looking at a meaningful change of pace for the market that we are reviewing. Conversely, if the short-term EMAs are not moving around that much in relation to the long-term EMAs, then the market might be in a bit of a holding pattern, and it may be best to wait until there are some stronger signals coming out of the market.
The Parameters to Set on Your Guppy Indicator
To get the most use out of the Guppy indicator, you need to make sure you set the parameters exactly right on it. You will want to ensure that it captures all the data that you need it to, but you also want to make sure that data is truly what is happening in the market. To get both of those elements together, please consider setting your Guppy indicator to the following settings:
EMA periods of:
3, 5, 8, 10, 12, 15, 30, 35, 40, 45, 50, and 60
The periods of 3, 5, 8, 10, and 12 are meant to be the short-term EMAs, while the 15, 30, 35, 40, 45, 50, and 60 periods intend to show the long-term movements of the market.
That is critical because you don’t want to trade on something that is less than ideal for your setups. You can make a lot of mistakes in the market if you aren’t careful about how you set up the parameters of your indicators.
The short-term EMAs are intended to show you where the momentum is in the market.
The long term EMAs are supposed to show what the overall trend is.
This is why when the short-term crosses the long-term, it is a big deal. It means that the momentum of the trade has taken a turn, and you should probably consider how this might impact your overall trading strategy. You may need to reverse your position from where you are now, or you may want to simply leave your position and wait for a better opening to get back into the trade.
How Much Strength is in the Trend?
A trend is important to identify, but it also is obvious that you will want to know how powerful the trend is as well. Almost anyone can spot a trend if they look hard enough for it, but that is rather meaningless if you aren’t sure if the trend is for real or not.
The Guppy indicator is a great one for looking at the real strength behind a trend. To use the Guppy indicator as a measurement of strength in a trend, consider the following:
- How far apart are the long-term and short-term EMAs?
- Which direction are the EMAs pointed?
- Are the short-term and the long-term EMAs pointed in the same direction?
- How long as the current trend been running for?
- The separation between the long-term and short-term EMA ribbons is a particularly vital piece of information to zero in on. If there is a lot of separation between the two, then this is an indication that the prevailing trend appears to be pretty strong. If the two are closer together, then the trend may be less powerful and maybe preparing to reverse. If you are a trend trader trying to capitalize on price movement during trends, then you ought to try to get in when the trends are particularly strong.
How Can You Spot a Trend Reversal?
The best time to get out of a trade is right before the trend reverses. You want to capture as much of the profit on one side of the trade, but you don’t want to get flattened when it turns around on you. One way that you can get better at this is to use the Guppy indicator to try to spot trend reversals. If you want to, do this, look for a period of time when the short-term EMAs cross over the long-term EMAs. This is a good indication that the trend is about to reverse.
Obviously, if the short-term EMAs cross over the long-term ones in an upward direction, then this is a bullish sign for the market. If they cross downward, then this is a bearish sign for the pair.
Your role as the trader is to try to unwind your trades before the reversal occurs and potentially take your funds along with it. If you can brace yourself for the ups and downs of the market, then you know that you are going to face some uncertainty along the way.
That said, you should try to minimize as much of the volatility as you possibly can by using indicators such as the Guppy to try to spot when there is something new and interesting happening in the market.
If you can do that, then you stand a much better chance of capitalizing on as much of the movement as possible without losing too much of your trade in the process.
You should include the Guppy in your array of indicators to help make more sense of the market. Those who do this are often pleased by the results that they achieve, and that is a testament to how important certain indicators really are.
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