How to Analyze Trends With Moving Average Ribbons?

R

ibbon? What? Does somebody have a birthday today?

Nope, we are not giving you a gift with a ribbon on top, but we are gifting you the knowledge of analyzing trends with moving average ribbons.

What is a moving average ribbon in the trading world?

A moving average ribbon represents a series of moving averages, each of them with different lengths, plotted on the same chart, in order to compare the distance between them and determine the trend.

You can use as many averages as you want. Usually traders plot between 6 to 16 averages on a chart.

Traders not only see the trend by looking at these moving averages ribbon but they can also identify which areas are support or resistance and whether it will be a trend change.

How to Set Up a Moving Average Ribbon

“How many moving averages do you use?”

As we said, it all depends on you and your trading strategy.

One man’s trash can be another man’s treasure!

You might use 6-8 simple moving averages (SMA) and choose to be set on 10-period intervals, such as the 10, 20, 30, 40, 50, and 60-day SMAs.

On the other hand, you might not be satisfied by such a small number and you would want to set at least sixteen simple moving averages varying from a 50-day to a 200-day SMA.

You should choose between using SMAs and EMAs, as well.

It is said that SMAs give a more accurate look at the overall trend.

But it is really a matter of preference – Do you prefer French fries or British chips?

• Change the number of time periods used in the moving average
• Changing the type of moving average – either from a simple moving average (SMA) to an exponential moving average (EMA) or EMA to SMA

When you use a shorter number of periods for the moving averages, you can expect that the more sensitive will be the moving average ribbon when there are even slight price changes.

As opposed to that, when you use moving averages with larger numbers of periods (like 200), they will be less sensitive and smoother.

How to Trade with Moving Average Ribbons

• EXPANDING moving average ribbon.

It gives signals that it might be the potential end of a trend.

Simply, if the distance between the moving averages starts expanding, it can mean that the recent price direction has changed a lot and this could be the end of a trend.

It is also known as ribbon “expansion”.

•  CONTRACTING moving average ribbon.

It gives indications of a possible change in trend.

If the moving averages start turning towards each other, it can mean that the trend change has possibly started.

It is also known as ribbon “contraction”.

You can notice shorter-term moving averages coming together first, after a significant change in the price in one direction. Then the longer-term moving averages will follow this convergence.

• PARALLEL moving average ribbon.

It indicates that the trend is a strong one.

This is the best-case scenario when the moving average ribbons are arranged in a parallel with even space between each other. Then you can say that the current trend is strong.

They are dancing on the chart and moving together in a perfect symphony.

You should always analyze the spacing between the Moving Averages.

Don’t look only for crossing over or twists between the MAs.

It is important to observe the SPACING between them all the time.

In simple words, it means:

The positioning of short-term MAs to long-term MAs = the DIRECTION of the trend whether it is down, neutral or up.

Spacing between the MAs = the STRENGTH of the trend whether it is weak, neutral or strong.

Let’s see an example.

This is a 1-hour chart of GBP/USD with a moving average ribbon.

In the chart above, you can easily identify bullish or bearish trends by looking at when the moving averages start to cross over or “twist” lower or higher.

You can notice that there is a ribbon expansion at 1.6000, which means that space between the MAs is widening, therefore, it can be the end of the current trend.

Then, a while later you observe a ribbon contraction, which means that the narrowing of spacing between the moving averages suggests a start of a new trend.

However, you must remember that no forecast guarantees 100% success, and the trend can be reversed.

Next Article

Trend Trading with Guppy Multiple Moving Average (GMMA)

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