Daryl Guppy, 2/22/2004
An Extract from Tutorials in Applied Technical Analysis
This 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
itself does not initiate an entry or an exit. It 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. If there
is no trend, then the tool cannot be usefully applied. Traders should
not attempt to make it work in conditions to which it is unsuited. The
indicator was first discussed in Market Trading Tactics and in more
detail in Trend Trading (April 04 release), by Daryl Guppy.
We track the trader’s inferred activity 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. 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.
The GMMA is used in six trading situations. In this extract we
are interested in mid trend entry conditions. The remaining five
trading situations are covered in detail in the full newsletter.
Midtrend Entry
The midtrend entry analysis is designed to answer a simple
question. Is it safe to buy on this temporary price retreat? The
circled area on the chart shows the point where we want to apply the
analysis. There are three relationships we look for. They are:
1. The character of the long term group.
2. The character of the short term group
3. The relationship between the two groups.
The long term group is the most important because without support from
investors, the trend cannot continue. The strength of this support is
shown by the degree and nature of the separation of averages in the
long term group. When the group is well separated, and generally moving
upwards and parallel, we know the trend is very strong. This reduces
the probability of a sudden trend collapse.
The short term group of averages – the traders - deliver a consistent
pattern of retreat and rebounds. We need to decide if the current
retreat is unusual, out of character, or severe. In this example it is
part of an established pattern of general retreats and rebounds. This
is not a dramatic sell off, so there is again a reduced probability of
a trend collapse.
Finally consider the separation between the two groups. This trend, at
the point circled, has never been under threat. Traders have not been
successful in driving prices down. Instead as prices dip, investors
step into the market as buyers. This is shown by the way the two groups
of averages remain separated even on these trader driven retreats.
This is a strong trend with a temporary price retreat. It is a safe
entry.
Article by Daryl Guppy author of:
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