A Straightforward Guide to the Mayer Multiple
While many indicators exist to help technical analysts plan investment strategies, I like to keep my trading toolbox as tidy as possible. RSI, stoch, MACD and even Ichimoku clouds all get a look in, but by far and a way my favourite is the simple moving average (MA). These often get overlooked or derided as lagging indicators but, used correctly, they can help you map out dynamic support and resistances or the flow of your asset, if you like.
MAs are periodic. That means for a given period, say 50, the average is calculated over the preceding 49 candles plus the present one. Some are also given more significance than others. For example the 200 daily MA, which is taken over the previous 40 weeks, is considered to be a major support/resistance level. In fact, many people consider an asset to be turning bearish once it dips below it. Consequently, buying below the 200 daily MA is considered good practice for long-term strategies.
The Mayer Multiple (µ), developed by analyst and investor Trace Mayer, is a statistical estimator that allows you to see how common a given price level is in relation to the history of your asset. It is simple to calculate
µ = price / 200 daily MA.
It returns a value µ > 0 which is a multiple of your asset’s 200 daily moving average. For example, the current Bitcoin price is $6660 and its 200 daily MA is $7270. This means that
µ = $6660 / $7270 = 0.92,
therefore today’s µ is 0.92 times today’s 200 daily MA (that’s why you’ll often see µ = 0.92x, but the x is poor notation if you ask me).
That’s all great but is it a buy (and WEN MUUN BRUH)? Well, this is where the statistical analysis comes in. I will now show you how I analyse an asset using the cryptocurrency called Ripple as our model.
Take a look at the above chart. You’ll notice that the Mayer Multiple often remains at or close to µ = 1. That means for most of its history, Ripple has generally remained near its 200 daily moving average, in other words it moved sideways in a fairly narrow range. Sojourns above µ = 2 are rare although the maximum recorded value is approx. µ = 16. Likewise the Mayer Multiple rarely drops below µ = 0.5. These extremes, of course, represent the tops and bottoms of market cycles.
Now I’ve used some qualitative statements like rare and often, which we can gather by just eyeballing the chart. But what about some hard numbers?
The above chart is a histogram. It’s basically a fancy bar chart. Each column (known as a bin) represents the percentage of days when µ was in the given range, e.g. the first column tells us that over Ripple’s entire history, the Mayer Multiple was between 0 and 0.50 just 8.45% of the time. Likewise at the other end µ > 6.0 occurred just 2.13% of the time.
Today’s Mayer Multiple has a value of µ = 0.91 which tells that the relationship between Ripple’s spot price and its 200 daily moving average is pretty average, seeing as 0.50 < µ < 1.50 for almost 75% of the currency’s history. And indeed, eyeballing the first chart again we see that the distance between the Mayer Multiple and its 200 daily moving average is similar to much of the back history. (Remember: the 200 daily MA in the first chart is the moving average of the indicator, not the price!)
Another useful way to look at all this is by plotting the cumulative percentage. This is just a running tally of the percentages calculated for the bins above.
It shows us that 100% of all daily µ values were less than 16 and none were less than zero. For today’s value of 0.91, we can read that about 63% of the time µ < 0.91.
So if we naively think of these percentages as probabilities, we can say that there is a 63% likelihood that the Mayer Multiple will decrease and a 37% likelihood that it will increase from here. Of course, rising µ means that the price action is becoming increasingly bullish with respect to the 200 daily moving average, e.g. the trading activity of the previous 40 weeks.
SO WEN MUUN? WEN LAMBO?
Obviously it’s not about maximising µ or you’ll just end up buying the top. Likewise low µ does not necessarily mean you are buying the bottom, you could be part of a larger down trend. The Mayer Multiple doesn’t work like that, you’ll still need to apply your trading acumen BRUH. However, anyone that appreciates moving averages and understands the power of the 200 daily MA over the market’s collective psyche will find it a great tool for examining the back history within a simple statistical framework.
Resources
Spreadsheet for above example https://drive.google.com/open?id=1BP1M_8BPy6ACz_kS7Lx1NvwOq5OUqyIG
The Investors Podcast https://www.theinvestorspodcast.com/bitcoin-mayer-multiple/