A moving average ribbon is what it sounds like.
A moving average ribbon is a chart that displays a sequence of moving averages of varying lengths.
The main idea behind “moving average ribbons” is that instead of using one or two moving averages on a chart, you use a slew of them, usually between 6 and 16 moving averages (or more).
Everything is on the same graph.
Consider the following example:
Traders can use the smoothness of the ribbon to determine the strength of a trend and to identify significant points of support or resistance by looking at the price in relation to the ribbon.
How to Set Up a Moving Average Ribbon
It is entirely dependent on the trader.
Some traders prefer to employ six to eight 10-period simple moving averages (SMAs), such as the 10, 20, 30, 40, 50, and 60-day SMAs.
Other traders prefer to use SIXTEEN (or more) simple moving averages ranging from a 50-day SMA to a 200-day SMA and everything in between.
The reason for adopting longer-term moving averages is that they provide a more accurate picture of the overall trend.
Other traders choose to utilize exponential moving averages rather than simple moving averages.
So it basically comes down to personal preference.
The moving average ribbon’s responsiveness can be altered by:
- Changing the number of time periods used in the moving average
- Changing the type of moving average from a simple moving average (SMA) to an exponential moving average (EMA)
- The sensitivity of the moving average ribbon to price changes is proportional to the number of periods utilized when selecting which MAs to add to your chart.
- Moving averages with more periods (such as 200) are less sensitive and smoother.
How to Trade with Moving Average Ribbons
1. An EXPANDING moving average ribbon signals the potential end of a trend.
When the moving averages begin to widen and separate, also known as ribbon “expansion,” it indicates that the current price movement has reached an extreme and may indicate the end of a trend.
Consider each moving average to be a magnet that attracts others.
They do not want to be apart for an extended period of time. When they are, they will want to close the gap.
2. A CONTRACTING moving average ribbon signals a possible change in trend.
A trend change may have begun when the moving averages begin to converge and get closer to one other, also known as ribbon “contraction.”
Shorter-term moving averages will converge first after an enormous price move in one direction. Longer-term moving averages will gradually converge.
3. A PARALLEL moving average ribbon signals a strong trend.
Moving average ribbons that are parallel and uniformly spaced indicate that the present trend is robust.
Because they are going together, all of the moving averages are in “agreement.”
Keep an Eye on the Spacing Between the Moving Averages
Some traders make the mistake of just looking at the moving averages when they “cross over” or “twist.”
While it is critical to keep an eye on when the short-term moving averages cross above (or below) the long-term moving averages, it is equally critical to keep an eye on the SPACING between the moving averages.
The positioning of short-term moving averages in relation to long-term moving averages indicates the trend’s DIRECTION (down, neutral, up).
The spacing between the moving averages indicates the STRENGTH of the trend (weak, neutral, strong).
Moving Average Ribbon Example
Let’s take a look at a moving average ribbon applied to GBP/USD on a 1-hour chart.
Can you see the trend changes?
When the moving averages begin to cross over or “twist” lower or upwards in the chart above, you can readily detect bullish or bearish trends.
Ribbon expansion or the widening of the space between the moving averages, indicates the end of the present trend.
Ribbon contraction, or a shortening of the space between moving averages, indicates the beginning of a new trend.