The Guppy Count Back
By Jason Mitchell
What Is The Guppy Count Back ?
The Guppy Count Back is a price based level
that determines a possible entry and/or exit point for trend trading.
It was originally based on the 3 Bar Nett Line by Stowell which was used for bond trading however was adapted by Daryl
Guppy to suit equity markets.
The tool uses recent price action to determine whether or not a trend has changed its nature and may be turning, however as noted by Daryl Guppy
the indicator/signal should not be used on it's own.
Essentially the basic Guppy Count Back has two parts - an entry line and an exit line.
The entry line is a chart based level that tells us when a downtrend has changed and an uptrend may be starting. The Exit Line on the
other hand tells us when an uptrend has changed and a downtrend may be starting.
I was first made aware of this indicator by Daryl Guppy in his books, and as such I refer to it as the Guppy Count Back.
The above chart shows the Guppy Count Back (Count Back as I will refer to it from now on). The red line shows
exit points as determined by the Count Back. When price moves below this it signals an exit from an uptrend.
The Blue Line is the Count Back Entry Point. As price moves above this it signals an entry in to an uptrend. The entry
actually occurs one bar earlier than shown and occurs at a slightly better price.
As price moves up in an uptrend the Count Back Exit also moves up and can be used as a trailing stop.
As price moves down in a downtrend the count back also moves down and can be used as a trailing stop on the short side.
Again I would stress that I do not advocate the use of this tool on it's own and indeed the creator Daryl Guppy mentions
that the signals are best combined with GMMA Analysis or Trendline analysis. We will look at this chart again below and see why this is important
to help reduce false entries and exits.
How Is The Guppy Count Back Calculated ?
The easiest way to explain this is to demonstrate it.
As mentioned earlier, it is chart based and it is a simple indicator that does not require any complex
mathematics.
For the sake of the explanation we will look at a Count Back Entry Line" first:
Step 1) Find the lowest low point of the trend so far. This is marked bar 1 in the chart above.
Step 2) Go back (left) from the high until you find a bar with a higher high. This becomes bar 2.
Step 3) Go back (left) from the high again until you find a bar with a higher high. This becomes bar 3.
The high of Bar 3 becomes the Count Back Entry Level.
We can then draw a line across from the high of bar 3 to the right.
Once price closes above this level this
signals an Entry as per the count back.
I have included two more examples in the charts below:
As price makes new lows in a downtrend we keep re-calculating the level and in this way it acts as a trailing stop for the short
side.
When we look at the Count Back Exit the Process is reversed. By this I mean that we look for the highest high in the trend
and work back from the low of this bar. This is shown below:
Step 1) Find the highest high point of the trend so far. This is marked bar 1 in the chart above.
Step 2) Go back (left) from the low until you find a bar with a lower low. This becomes bar 2.
Step 3) Go back (left) from the low again until you find a bar with a lower low. This becomes bar 3.
The low of Bar 3 becomes the Count Back Exit Level.
What Does The Guppy Count Back Tell Us ?
At a basic level the indicator does give buy and sell signals. However these
should not be used on their own.
Daryl Guppy suggests that the indicator is best used when analysing trending situations and when it is used with the Guppy MMA. He discusses using
the Count Back as a confirmation tool that can be used to confirm breaks of trendlines and to confirm changes of trend with the Multiple moving averages. It is used
for both trend entry and trend management.
Guppy also suggests that it is best used in Stocks where the tool has been compatible with trends previously. For example if we join a
trend and the Count Back has NOT been giving false exits then it is possibly a compatible tool. However if there have been a number
of false exits then we may decide to use other trailing stop/entry methods.
The chart below shows a stock that is compatible with the Count Back (red line)and the Guppy Multiple Moving Averages. It is compatible
as there have been no false exits below the Count Back Level. A move below this would be a change in the nature of the trend.
Compatible - Count Back Entry Shows No False Exits
In the following stock however the Guppy Count Back is not overly compatible. We can see this by the number of false exits during the trend
(circled areas). A move below this level does not show a change in the trend and so tells us nothing new. We would be required
to use a different stop on this trend in order to be more confident in its signal.
Less Compatible - Count Back Entry Shows A Number of False Exits
In saying this however the chart above illustrates
why Daryl Guppy uses the count back with the GMMA. Even though there is a false exit shown by the Count Back the GMMA shows trend
support is continuing and that there is no need to exit on these signals if we are using a trend following strategy.
Interpreting the Count Back
Interpretation of this tool could not be easier. A close above the Count Back
Entry Line is an entry signal for long positions and can be used to help capture breakouts from a downtrend to an uptrend.
A Close below the count back exit line is an exit signal for long positions and can be used to help lock in profit or as an entry
level for short positions.
We stress however that neither we nor the creator would act on these signals alone. They must be part of an overall analysis process.
The Guppy Count Back as previously mentioned is useful as a confirmation tool or as part of an overall analysis of a trend. In his books Daryl Guppy suggests that in a trend following situation, a move below
the count back should not be taken as an exit signal unless there is confirmation from the GMMA or a break in a trendline. In other words if we see a move below
the count back yet the Guppy MMA shows trend strength then we may wish to confirm this exit further and wait for a break below a trendline
or wait for weakness in the GMMA to develop.
Conversely a move above the count back entry does not on it's own mean the stock is ready to move up. Confirmation of a trend change
using the GMMA or a trendline is preferential here.
Setting Maximum Buy Prices
One of the other features of the Guppy Count Back is that it offers users a maximum chase level. That is a level which we should not
act beyond. This level is determined by adding /subtracting the distance from the pivot point to the count back level.
For example if we have a chart where the low is at $1.00 and the count back entry is at $1.15, then the distance between the pivot point and
the count back is $0.15. If we add $0.15 to the count back ($1.15 + $0.15 = $1.30) we get a maximum chase level of $1.30. This
means that if we are entering on a trend change and we plan to buy as price moves above $1.15 then we must get in before $1.30.
An example of this is shown in the following chart.
We can see in the above chart the low point is at $11.55.
The Count Back is at $12.40
The distance between the two is: $12.40 - $11.55 = $0.85
If we add $0.85 to the Count Back at $12.40 we get: $12.40 + $0.85 = $13.25
The maxium chase price (or the maximum buy price) for this breakout is $13.25.
The idea of this method is to help stop us from buying stocks that have moved too far from the breakout point. Of cours ejust because
a stock moves above this level does not mean it will not continue. The method is simply an added application of the Count Back and
can be used as a rough guide for this purpose. In my own trading I often find this maximum chase price is too high based
on my preferred stops and so I do not use this aspect of the count back.
This chart or stock actually gives us a good example of the use of the Count Back as an entry tool. Lets go back a few days in time
to the breakout of the trendline. This time we will add the GMMA in to the analysis as recommended.
Example of Using the Count Back
Note how in the following chart there has been a break above the trendline on the last day shown. This break is NOT confirmed
by the Count Back (Dotted Line at $12.40) and there is no weakness noted in the GMMA (note the red group is well expanded).
At this point the break in the trendline is NOT a confirmed signal and it is still too early to consider entering on this break.
Using the count back we now know that price needs to get above $12.40 before a change in trend is confirmed and we would like
to see the GMMA changing its nature.
A week or so passes and finally there is a close above the Count Back. The close is only just above the level however it does move
above it. The only issue is the GMMA is showing weakness in the downtrend but does not show that it is over.
Aggressive traders may take an entry at this point using the Count Back Method however it would be advantageous to see more
evidence of a change in the MMA. Technically the Count Back has given a signal however this is not being confirmed.
Price does pullback from this point and creates a new low for the trend. This shows exactly why it is best to get confirmation
from the GMMA that the downtrend is over.
This new low could create a NEW Count Back level at $12.60. However just as a trailing stop can not move down, the count back entry can not move up.
We use the lowest value for the trend so far which is $12.40. We show this
example as it is not a "perfect" example but one that reflects real time use.
The price moves back to the trendline on the pullback but can not move below it and then starts to rebound. This is a classic behaviour in a stock
that is changing its trend. Again aggresive traders may go long at this point however more conservative and risk averse traders
would still need to see price move above $12.40 and the GMMA would need to show that the
downtrend is over. At this point we could place the stock on a watchlist and look for a move above $12.40.
After some more time passes price moves upwards strongly and moves above the count back line. The GMMA is also piercing
upwars and the downtrend has lost its strength.
We know the maximum buy price and we can see that an entry is available based on this breakout over a number of days at
good levels offering strong risk reward profiles. This is the point most traders are happy to enter.
From this point we would look to manage the trade as a trend trade and would look to ride any uptrend that occured for as long
as possible. We can see that trendlines, the count back and the GMMA are useful tools in the stock and so these would
probably be adequate for management of the ensuing trend.
The price does rise as shown in the chart below and the trendline and GMMA are useful in the management however the count
back gives a few false signals. As these were not confirmed by the GMMA however they are not truly exit points.
The price moves as high as $17.00 before price starts to falter and there is a close below the trendline at around $15.00 to $16.00.
The price continued to move sideways from this point until the GMMA showed severe weakness. It is likely that an exit at $15.50 or better
would have been achievable.
The above charts are designed to demonstrate how I view and more importantly use the Count Back.
What Question(s) Does the Count Back Answer
* Has there been any change in the trend.
If a stock continually trends in one direction without moving
across the Guppy Count Back then we could say the trend has been fairly stable. Further to this however IF price does move
across the level for the first time in a trend then this would signal a change in the nature of the movement and could
be a sign that the trend is about to change.
What Are The Well Published Signals
* Close ABOVE the Count Back Entry (look for confirmation).
* Close BELOW the Count Back Exit (Look for confirmation).
What Other Indicators Work Well With This
* Line Studies (particularly trend lines)
* Guppy Multiple Moving Averages
* Trendlines on Point and Figure Charts
* Moving Averages
General Notes
Personally I like the use of the Count Back as
a confimation tool for entering breakouts as shown in the example above. As a trailing stop however I find I use it
more on low priced shares and often they are from the resource sector. I find that in some of the more liquid shares in the ASX200
that there is often a lot of false signals. This is not a major issue as I often use an ATR Trailing Stop as opposed to the Count Back
in any case. There are times however that the Count Back is a superior trailing stop and at these times when it has worked
well in the past I am happy to use it.
My belief on trends is simple, buy shares that are going up and have had good support over both the long term and short
term. The guppy multiple averages and the count back can combine to ascertain whether this has happened or not.
This Article was written by Jason Mitchell
for StarTraderReport.com
© Copyright Jason Mitchell 2006
Testing Results
Testing Results for the Count Back will be available soon.
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