How to Analyze Trends With Moving Average Ribbons

What is a moving average ribbon？

Moving average ribbons are a series of moving averages (MA) of different lengths that are plotted on the same chart to create a ribbon-like indicator. Traders can determine the strength of a trend by looking at the distance between the moving averages, as well as identify key areas of support or resistance by looking at the price in relation to the ribbon.

The main idea behind the concept of “moving average ribbons” is that instead of using one or two moving averages on a chart, you are using a cluster or group of moving averages, usually between 6 to 16 moving averages (or more). All on the same chart.

Lets take a look at an example below:

Traders can examine the strength of a trend by looking at the smoothness of the ribbon, as well as identifying the key areas of support or resistance by looking at the price in relation to the ribbon.

How to Set Up a Moving Average Ribbon

Now you get to know what moving average ribbon is, so the next important thing to know is how many moving averages do you use？

But this really depends on the trader. Some traders like to use sixto eight simple moving averages (SMA) set at 10-period intervals, such as the 10, 20, 30, 40, 50, and 60-day SMAs.

Similarly Other traders like to set up with SIXTEEN (or more) simple moving averages varying from a 50-day to a 200-day SMA and everything in between.

The use of longer-term MAs is justified on the grounds that it provides a more accurate picture of the overall trend.

Other traders, on the other hand, prefer to utilize exponential moving averages rather than simple moving averages. As a result, everything comes down to personal preference.

But The dispute for using longer-term MAs is that it gives a more accurate look at the overall trend.

The responsiveness of the moving average ribbon can be adjusted by:

• Changing thenumber 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 shorter the number of periods used when selecting which MAs to add to your chart, the more sensitive the moving average ribbon is to slight price changes.

Using moving averages with larger numbers of periods (like 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 that the trend may be coming to an end.

Consider each moving average to be a magnet that attracts the others. They dont want to be separated for long periods of time. As a result, when they are, they will want to close the gap.

2. A CONTRACTING moving average ribbon signals a possible change in trend.

When the moving averages start to converge and get closer to each other, also known as ribbon “contraction”, a trend change has possibly started.

After an extreme move in price in one direction, you will notice shorter-term moving averages converge first. The longer-term moving averages will slowly converge.

3. A PARALLEL moving average ribbon signals a strong trend.

This indicates that the present trend is strong when the moving average ribbons are parallel and equally spaced.

Because all of the moving averages are heading in the same direction, they are in “accord.”

Keep an Eye on the Spacing Between the Moving Averages

Among the traders, some make the mistake of simply watching the moving averages when they “cross over” or “twist.”

While it‘s fastidious to keep an eye on when short-term moving averages cross above (or below) long-term moving averages, it’s also crucial to keep an eye on the SPACING between them.

The DIRECTION of the trend is shown by the positioning of short-term moving averages in relation to long-term moving averages (down, neutral, up).

The distance between the moving averages indicates the trends STRENGTH (weak, neutral, strong).

Moving Average Ribbon Example

Lets consider some examples on moving average ribbon applied to GBP/USD on a 1-hour chart.

Can you observe the changes on the trend？

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

The widening of the space between the moving averages, known as ribbon expansion, indicates the end of the current trend.

While The shortening of the space between the moving averages, or ribbon contraction, indicates the onset of a new trend.

when the price moves through the ribbons, the ribbons can also be used to signal potential trend changes or the ribbons cross each other. The trader examines how many MAs are used to create the ribbon, as well as the lookback periods (length) of each ribbon.