Guppy Multiple Moving Average Trading Strategy: Backtest and Evaluation
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 show 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.
Guppy multiple moving average strategy backtest and best settings
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.
An hourly chart of the S&P 500 index shows the GMMA indicator. The short-term group of moving averages is the green lines while the long-term group is 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.
Short-term MAs 3, 5, 8, 10, 12, and 15
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, this sum up to make twelve. However, you can tweak it to any number you want.
The formula for the GMMA is as follows:
EMA = [Close price – EMA_{p}] X M + EMA_{p}
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 EMA_{p }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.
- Calculate the simple moving average, SMA for N.
- Calculate the multiplier, M. (Use the same value for N above).
- 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.
- 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.
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:
- Moving average trading strategies
- Exponential moving average (backtest strategy)
- Hull moving average (backtest strategy)
- Linear-weighted moving average (backtest strategy)
- Adaptive moving average (backtest strategy)
- Smoothed moving average (backtest strategy)
- Variable moving average (backtest strategy)
- Weighted moving average (backtest strategy)
- Zero lag exponential moving average (backtest strategy)
- Volume weighted moving average (backtest strategy)
- Triple exponential moving average TEMA (backtest strategy)
- Variable Index Dynamic Average (backtest strategy)
- Triangular moving average (backtest strategy)
- McGinley Dynamic (backtest strategy)
- Geometric moving average GMA (backtest strategy)
- Fractal adaptive moving average FRAMA (backtest strategy)
- Fibonacci moving averages (backtest strategy)
- Double exponential moving average (backtest strategy)
- Moving average slope (backtest strategy)
We have also published relevant trading moving average strategies:
- The 200-day moving average strategy
- Trend-following system/strategy in gold (12-month moving average)
- Trend following strategies Treasuries
- Is Meb Faber’s momentum/trend-following strategy in gold, stocks, and bonds still working?
- Trend following strategies and systems explained (including strategies)
- Does trend following work? Why does it work?
- A simple trend-following system/strategy on the S&P 500 (By Meb Faber and Paul Tudor Jones)
- Conclusions about trend-following the S&P 500
- Why arithmetic and geometric averages differ in trading and investing
FAQ Guppy multiple moving average
Let’s end the article with a few frequently asked questions:
What is the Guppy Multiple Moving Average (GMMA) strategy?
The Guppy Multiple Moving Average (GMMA) strategy is a technical analysis tool used to identify changes in the strength, direction, momentum, and duration of a trend in a financial market. It is based on the concept of combining multiple moving averages of different time periods to provide traders with a more comprehensive view of market activity. As such, it offers a different approach than many of the other moving average strategies.
What are the benefits of using the GMMA strategy?
The GMMA strategy is beneficial because it presumably can provide traders with a clearer picture of the current market trend, enabling them to make more informed trading decisions. The strategy also allows traders to identify potential buying and selling signals, as well as areas of potential support and resistance.
But at the end of the day, you need to backtest any strategy yourself or you risk fumbling in the dark.
How does the GMMA strategy work?
The GMMA strategy utilizes two distinct sets of moving averages, which are referred to as the “Guppy” and the “Trigger”. The Guppy consists of 12 exponential moving averages of various lengths, ranging from 3 to 30 days (for example).
The Trigger consists of 6 exponential moving averages of various lengths, ranging from 3 to 10 days. When the moving averages in the Guppy converge or diverge from each other, it can indicate a change in trend.
Similarly, when the moving averages in the Trigger converge or diverge from each other, it can indicate a potential buy or sell signal.
Does the Guppy multiple moving average work?
In our backtests the average performed on the low end of our ranking. However, we tested on stocks, so it might perform better on other assets. No asset is the same!
What indicators should I use in conjunction with the GMMA strategy?
Traders may use indicators such as Relative Strength Index (RSI), Average Directional Index (ADX), and Moving Average Convergence Divergence (MACD) to complement the GMMA strategy. These indicators can help traders identify potential buying and selling opportunities and confirm the trend direction.
We use several indicators ourselves in our trading.
Do I need to use specific charting software to use the GMMA strategy?
No, you do not need to use any specific charting software to use the GMMA strategy. Most charting software packages will include the necessary charts and indicators for traders to use the GMMA strategy. However, it is important to note that different charting software packages may have different features and capabilities, so it is important to choose the one that best suits your trading needs.
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.
FAQ:
What is the Guppy Multiple Moving Average (GMMA) strategy?
The GMMA strategy offers traders a clearer picture of the current market trend, enabling more informed trading decisions. The GMMA strategy is a technical analysis tool used to identify changes in the strength, direction, momentum, and duration of a trend in a financial market. It combines multiple moving averages to provide a comprehensive view of market activity.
How does the GMMA strategy work?
The strategy utilizes two sets of moving averages: the Guppy (12 EMAs of various lengths) and the Trigger (6 EMAs of various lengths). Convergence or divergence in these moving averages can indicate a change in trend or potential buy/sell signals.
What indicators should I use with the GMMA strategy?
You can use most charting software packages that include the necessary charts and indicators for the GMMA strategy. Traders may use indicators like Relative Strength Index (RSI), Average Directional Index (ADX), and Moving Average Convergence Divergence (MACD) to complement the GMMA strategy and confirm trend direction.