Moving averages are truly versatile and universal, and provide traders with many possibilities of usage, limited by traders’ imagination only. In a previous material we have already discovered how two moving averages may be combined to form a working analysis tool for trading. However, there are techniques that require a further increase of the moving averages’ amount. This time we will be exploring the Moving Average Ribbon method.
What is the Moving Average Ribbon method?
A formation of several moving averages, plotted around the price chart in a ribbon-like shape is used to determine the strength of the trend as well as set multiple support and resistance levels. The ribbons’ crossings may also help identify possible trend reversals and optimal conditions for trade entries.
The moving averages are set with intervals between them to form a chart-plotting net. At the same time, traders are free to choose the amount of moving averages that they want to use: it can be a simple or a more complex structure, depending on the trader’s preference.
How to trade with the Moving Average Ribbon indicator
The Moving Average Ribbon system can be used in many ways. Parts of the system may become support and resistance lines, while the width of the corridors might indicate the strength of the ongoing or emerging trend.
One of the many possible ways to set up the MA ribbons is to use 10 Simple Moving Averages, splitting them equally between short and long timeframes. With this approach, 5 SMA indicators are set with short intervals (4,7,11,14,17) and 5 — with longer intervals (30, 35, 40, 45, 50).
Uptrend
The method is based on the interaction of the two groups of indicators. A strong bullish trend may be expected if the following conditions are met:
- The group of short-term MAs crosses all of the long-term MAs from below above;
- The short-term moving averages are aligned in their sequence (the 4 period MA is above the 7 period MA, which is in turn above the 11 period MA and so on);
- The moving averages are close to each other, forming a tight ribbon.
An example can be seen in the following picture:
The 5 short-term moving averages (green) are crossing the long-term moving averages (red) and align in the sequence 4>7>11>14>17. The crossing is followed with a strong uptrend on EUR/USD.
Downtrend
The ribbons can indicate an emerging bearish trend, too. Traders might consider entering a Selling position if the following conditions are fulfilled:
- The short-term moving averages crosses all long-term MAs from above below;
- The short-term indicators are aligned in an opposite sequence: the 17-period MA is above the 14-period MA, which in turn is above the 11-period MA and so on;
- The MAs are located close to each other and form a narrow ribbon.
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