Guppy Multiple Moving Average – Trading Strategy Backtest (Does it work?)

Last Updated on May 21, 2022 by Quantified Trading

Guppy multiple moving average strategy backtest

Trend traders are always looking for trading opportunities by analyzing the price chart. This includes spotting a trend early as well as knowing when a reversal is about to occur. Interestingly, the Guppy Multiple Moving Average can be helpful in that aspect. But do you know what the Guppy Multiple Moving Average is? Can you make profitable Guppy multiple moving average strategies in the markets?

The Guppy multiple moving averages indicator shows one of the lowest returns for crossovers among the different moving averages, but the long-term average gains per trade shows decent returns close to 9% per trade.

The Guppy Multiple Moving Average, GMMA, is a technical indicator that uses moving average ribbons to provide a potential sign of a breakout in the price of a security. It uses multiple exponential moving averages (EMAs) to capture the difference between the current price and the average price over different periods. A convergence of the moving averages is associated with a significant trend change.

Does a Guppy multiple moving average strategy work? We backtest different strategies

Before we go on to explain what a Guppy multiple moving average is and how you can calculate it, we go straight to the essence of what this website is all about: quantified backtests.

Our hypothesis is simple:

Does a Guppy multiple moving average strategy work? Can you make money by using Guppy multiple moving averages strategies?

We look at the most traded instrument in the world: the S&P 500. We test on SPDR S&P 500 Trust ETF which has the ticker code SPY.

Because a Guppy multiple moving average consists of 12 different moving averages, we summed all of them and divided by 12.

All in all, we do four different backtests:

  • Strategy 1: When the close of SPY crosses BELOW the Guppy moving average, we buy SPY at the close. We sell at the close when SPY’s closes ABOVE the Guppy average. We use CAGR as the performance metric.
  • Strategy 2: Opposite, when the close of SPY crosses ABOVE the Guppy moving average, we buy SPY at the close. We sell at the close when SPY’s closes BELOW the Guppy average. We use CAGR as the performance metric.
  • Strategy 3: When the close of SPY crosses BELOW the Guppy average, we sell after N-days. We use average gain per trade in percent to evaluate performance, not CAGR.
  • Strategy 4: When the close of SPY crosses ABOVE the Guppy moving average, we sell after N-days. We use average gain per trade in percent to evaluate performance, not CAGR.

The results of the first two strategies look like this:

Strategy 1

CAR

5.24

MDD

-36.88

 

Strategy 2

CAR

4.27

MDD

-44.83

 

The crossover system in strategies 1 and 2 shows one of the lowest CAGRs among all the moving averages we have backtested (see full list further down). Strategy 1, which buys on “weakness” and sells on strength, is somewhat better than the opposite signal in strategy 2.

The results from backtests 3 and 4 looks like this (the results are not CAGR, but average gains per trade):

Strategy 3

Bars

5

10

25

50

100

200

0.14

0.33

1.04

1.86

4.42

8.74

 

Strategy 4

Bars

5

10

25

50

100

200

0.07

0.25

0.59

1.36

4.69

8.2

 

As expected, the longer you are in the stock market, the better returns you get. This is because of the tailwind in the form of inflation and productivity gains. The returns by holding for 200 days after a signal is competitive compared to buy and hold.

What is the Guppy multiple moving average (GMMA)?

The Guppy Multiple Moving Average, GMMA, is a trend following indicator used to spot when a trend is about to begin or end. It uses a combination of two sets of moving averages (MA), often EMAs, with different lookback periods.

See the chart below.

Guppy multiple moving average

An hourly chart of the S&P 500 index showing the GMMA indicator. The short-term group of moving averages are the green lines while the long-term group are the red lines

These two sets of moving averages are short-term MAs and long-term MAs, with each group having six moving averages, making a total of twelve moving averages plotted on the price chart of the S&P 500. The default settings of the short-term moving averages are set at 3, 5, 8, 10, 12, and 15 lookback periods. While the long-term moving averages are set at 30, 35, 40, 45, 50, and 60.

gmma

Short term MAs 3, 5, 8, 10, 12, and 15

Guppy multiple moving average (GMMA)

Long-term MAs 30, 35, 40, 45, 50, and 60.

An uptrend is characterized by the short-term moving average crossing above the long-term moving averages. When the short-term set of moving averages crosses below the long-term set of moving averages, the trend may be changing to a downtrend.

The Guppy multiple moving average indicator was developed by an Australian trader, Daryl Guppy, and it was named after him.

How to calculate the Guppy multiple moving average

The Guppy multiple moving average indicator uses exponential moving averages (EMAs). There is a set of short-term moving averages, and another set of longer-term moving averages, these sum up to make twelve. However, you can tweak to any number you want.

The formula for the GMMA is as follows:

 

EMA = [Close price – EMAp] X M + EMAp

Or

SMA = Sum of N Closing Price/N

 

Where;

EMA = exponential moving average

EMAp = exponential moving average of the previous period

SMA = Simple moving average (this can be substituted for the EMAp for the first calculation)

N = Lookback period

M = Multiplier (calculated as 2/N+1)

Calculating the GMMA

Just follow these steps for each individual moving average. You can change the N value to calculate the exponential moving average you want. For instance, use 5 to calculate the five-period average, and use thirty to calculate the thirty-period exponential moving average.

  1. Calculate the simple moving average, SMA for N.
  2. Calculate the multiplier, M. (Use the same value for N above).
  3. The EMA is calculated using the most recent closing price, SMA, and a multiplier. The SMA is inputted in the EMA’s previous period position in the formula. Once the EMA value has been calculated, the SMA will no longer be useful because from then on. The EMA calculation can be used for the subsequent parts of the calculation.
  4. Repeat the calculation for the next N value, until you have the EMA value for all the twelve moving averages.

Sounds like an impossible task? You don’t have to worry about doing the calculation yourself as your trading platform will have it done automatically.

Why use the Guppy multiple moving average indicator?

Unlike other moving averages, the GMMA can be used to determine both the direction and strength of a trend. And because it employs the use of multiple moving averages, you get early warnings of a consolidation allowing you to stay out of the market. It can be used for long-term and short-term trading.

How to use the Guppy multiple moving average indicator

To use the GMMA indicator, all you have to do is search on your trading platform – it is available on popular trading platforms. You may adjust the periods according to your preferred choice.

How can you use the Guppy multiple moving average indicator?

You can use the crossover of the short-term and long-term moving averages for buying and selling. If the short-term group crosses above the long-term group, then a reversal to the upside is likely. In like manner, if the short-term group crosses below the long-term group, a reversal to the downside is likely.

Guppy multiple moving average indicator

How can you use the Guppy multiple moving average indicator

Secondly, when both groups of moving averages start seesawing or moving in a snake-like manner, it means that the market is in a period of consolidation. This tells you to stay out of the market unless you are a range trader.

Lastly, in a strong downtrend, when the short-term group moves up toward the long-term group only to start moving back to the downside; it is a signal that the trend is continuing, giving you another chance to short the market. You can apply the same concept in a strong uptrend market.

Relevant articles about moving averages strategies and backtests

Moving averages have been around in the trading markets for a long time. Most likely, moving average strategies were the start of the systematic and automated trading strategies developed in the 1970s, for example by Ed Seykota. We believe it’s safe to assume moving averages were a much better trading indicator before the 1990s due to the rise of the personal computer. The most low-hanging fruit has been “arbed away”.

That said, our backtests clearly show that you can develop profitable trading strategies based on moving averages but mainly based on short-term mean-reversion and longer trend-following. Furthermore, there exist many different moving averages and you can use a moving average differently/creatively, or you can combine moving averages with other parameters.

For your convenience, we have covered all moving averages with both detailed descriptions and backtests. This is our list:

We have also published relevant trading moving average strategies:

Drawbacks with the Guppy multiple moving average indicator

A major drawback of the GMMA is the usual lag manifested by moving averages because they use past price data for their calculations. Consequently, the GMMA crossover strategy can sometimes give you a late entry or exit as the price might have moved pretty well before producing signals. It is also prone to getting whipsawed resulting in a false trade.

 

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