# Exponential Moving Average Ribbon – Strategy And Rules

As traders, we rely on different tools to gain meaningful insights into the markets for better price analysis, and one too that may be of great help is the exponential moving average ribbon. What do you know about this indicator?

**An Exponential Moving Average Ribbon is a technical indicator system that consists of a series of exponential moving averages (EMAs) â€” often 8 to 16 â€” of different lookback period lengths plotted on a chart. Traders use the EMA ribbon to identify trends, the strength of a trend, trend reversals, and potential trading opportunities.**

In this post, we will take a look at most of the questions you may have about the exponential moving average ribbon: what it is, how it works, and how you can improve your trading strategies with it. Read on!

## Key takeaways

- An Exponential Moving Average (EMA) Ribbon is a technical indicator system.It consists of a series of exponential moving averages (EMAs).
- Typically includes 8 to 16 EMAs with different lookback periods.
- These EMAs are plotted on a chart.
- The different-colored moving average lines create the appearance of a ribbon.
- The ribbon provides valuable insights into the market’s trend.
- MoreÂ top trading indicatorsÂ if you click here.

**What is an Exponential Moving Average Ribbon?**

An Exponential Moving Average Ribbon is a technical indicator system that consists of a series of exponential moving averages (EMAs) â€” often 8 to 16 â€” of different lookback period lengths plotted on a chart. The bunch of moving average lines of different colors creates the visual appearance of a ribbon, providing valuable insights into the marketâ€™s trend.

The different lengths of those averages can be related geometrically or arithmetically. That is, the length of the second and subsequent EMAs increases by a certain number or a multiplier of the first EMA. The trader determines the increment/multiplier of the progression. Traders use the EMA ribbon to identify trends, their strength, trend reversals, and potential trading opportunities. The slope of the EMAs and where the price is relative to them generally indicate the direction of the trend, while the distance between the EMAs can be used to gauge its strength. Crossovers may indicate a potential change in trend direction. Also, the longer-period EMAs can serve as dynamic support and resistance zones.

## Exponential Moving Average Ribbon – trading strategy â€“ rules, settings, and returns

A backtested strategy is coming shortly.

**How do you calculate an EMA for stock prices?**

To calculate an EMA for stock prices, you follow these three steps:

- Compute the SMA for the given period.
- Calculate the multiplier for weighting the EMA
- Calculate the required EMA using the SMA and the multiplier

**Step 1: Compute the SMA for the given period:**

Calculating an EMA of any stock over a specified period starts with calculating the SMA for the same period. The SMA is the arithmetic mean of the stock prices over the given period, and the formula is given as:

SMA = (P1 + P2 + â€¦+ P_{N})/N

Where:

P = the prices of the stock for each period of the given number of periods

N = the number of periods

**Step 2: Calculate the multiplier for weighting the EMA:**

The multiplier is used to place more weight on the recent price data. It is calculated as follows:

Multiplier = 2/(N+1)

Where: N is the number of periods for the EMA.

**Step 3: Calculate the required EMA using the SMA and the multiplier:**

The final step is to apply the SMA and multiplier to the EMA formula, which is given as follows:

EMA = (P_{c} x multiplier) + [EMA_{p} x (1- multiplier)]

Where:

P_{c} = current price of the stock

EMA_{p} = previous EMA, which is the SMA in this case because there is no previously calculated EMA

**What is the purpose of using an EMA Ribbon?**

The purpose of using an EMA ribbon is to get a visual representation of the different trends in one short â€” the longer-period EMAs show the situation of the long-term trend, while the shortest-period EMAs show that of the short-term trend. The spacing between the EMAs can also be used to assess the strength of the trend â€” expanding ribbon lines show a runaway trend, while contracting spacing indicates trend weakness, pullbacks, or consolidations. Crossovers indicate a pullback or potential reversal. Also, the long-period EMAs can provide a dynamic support zone in an uptrend and a resistance zone in a downtrend.

**How does an EMA Ribbon help in trading?**

An EMA ribbon can help in trading by showing you the direction of the trend, the strength of the trend, and potential trend reversals. The slope of the EMAs and the position of the price relative to them can help you identify the direction of the trend â€” when they’re up, the trend is up, and when theyâ€™re down, the trend is to the downside.

The expansion of the spacing between the EMAs indicates a strong trend, while the contraction shows a weakening trend. EMA crossovers following a prolonged trend may indicate a potential reversal. You can use them as trade signals if other things in your trading system check out.

**Can an EMA Ribbon predict stock market trends?**

Yes, an EMA Ribbon can predict stock market trends, but the trends will depend on the lookback periods of the constituent EMAs in the ribbon. An EMA ribbon with long lookback periods, such as a 200-period or 250-period EMA, can show long-term trends, especially when used on higher timeframes.

For instance, a 250-day or 250-week EMA will show long-term stock market trends. On the other hand, an EMA ribbon with a maximum of 50-period EMA can at best show a medium-term trend, in addition to the short-term trends shown by short-period EMAs in the ribbon.

**What is the best time frame for an EMA Ribbon?**

The best time frames for an EMA Ribbon will depend on the result of your backtesting and your trading style. If you are a swing trader, you will be focusing on higher time frames like the 4-hourly and daily time frames.

On the other hand, if you are a scalper, you may be looking for trade setups on the 5-minute and 1-minute time frames or even the tick chart. Likewise, if youâ€™re a day trader, your focus would be on the hourly, 30-minute, or 15-minute timeframes. From your backtesting, you will find the best time frame for your trading style.

**How many EMAs make up a typical EMA Ribbon?**

The number of EMAs that make up a typical EMA Ribbon is usually about 8, but it can be as many as 16. It all depends on what the trader wants. If the trader wants only a few EMAs, they can even use only 4 to 6 of them and still get what they want from the market. With indicators, the fewer the better. Filling the chart with 22 EMA may not improve the trading result; instead, it may make it difficult to see the price action.

**What are the common settings for an EMA Ribbon?**

The common settings for an EMA Ribbon include the following:

**The price type**: This refers to the particular price data that is used for computing the EMAs. It is commonly the close price but can be the open, high, low, typical, median, or even weighted price.**The base lookback period length**: This refers to the length of the lookback period for the first (shortest-period) EMA in the ribbon.**The increment or multiplier**: This specifies by how much the second and subsequent EMAs would increase over the preceding one.**The increment/multiplier method**: This tells you whether the increment/multiplier would use an arithmetic or geometric progression for EMA length.

**How does an EMA Ribbon differ from a simple MA Ribbon?**

An EMA Ribbon differs from a simple MA Ribbon in that the former consists of a series of EMAs, while the latter consists of a series of SMAs. Apart from the MA type â€” EMA or SMA â€”, both ribbons are based on the same principle. However, given that EMAs give more weight to recent data while SMAs do not, EMAs move more closely with the recent price movement than their corresponding SMAs of the same length. Thus, for any given ribbon setting, the EMA ribbon would follow the recent price more closely than the SMA ribbon.

**What indicators complement an EMA Ribbon in analysis?**

Some of the indicators that can complement an EMA ribbon include oscillators and volume indicators. EMA ribbons can both spot the trend and produce trading signals, but volume indicators can help confirm those signals, especially the crossover and breakout signals. Volume indicators are only useful when trading stocks and other assets with real volume data.

Also, oscillators, like the RSI and stochastics, can be used to spot price swings in a trend. So, they can be combined with the EMA ribbon, where the ribbon is used to identify the trend and the oscillator is used to spot entries after a pullback.

**How do you interpret crossover points in an EMA Ribbon?**

You can interpret the crossover points in an EMA Ribbon as potential market reversals. This is especially true if the market has been trending in one direction for a long time. However, in some situations, the short-period EMAs may cross the long-period EMA, and there wonâ€™t be a reversal, but rather, a deep pullback. In such a situation, the reverse crossover would signal the continuation of the trend.

**Can an EMA Ribbon be used for all trading instruments?**

Yes, an EMA Ribbon can be used for all trading instruments since it is based only on price data. As long as the trading instrument posts reliable and consistent price data, the EMA ribbon can be created for the chart. However, this does not mean that the EMA ribbon system has an edge in all trading instruments. You have to backtest your system to know wherein which instrument you have an edge or not.

**How reliable is an EMA Ribbon in a volatile market?**

How reliable an EMA Ribbon is in a volatile market will depend on whether the market is trending in a particular direction or consolidating. In a strongly trending market, an EMA ribbon could be quite reliable. However, in a consolidating market, an EMA ribbon will perform badly because increasing volatility would mean non-directional price spikes.

**What are the limitations of using an EMA Ribbon?**

The limitations of using an EMA ribbon include:

- The multiple EMAS can present a visual distraction from the price action.
- The EMAs can lead to analysis paralysis, as you may not know which of the EMA to focus on.
- EMAs are generally lagging no matter how closely they follow price movements.
- The system is prone to late entries when used to identify entry signals.

**How do you set up an EMA Ribbon in trading software?**

To set up an EMA ribbon in trading software, you first check whether the software has a built-in EMA ribbon indicator. If it doesnâ€™t, you have to construct the ribbon yourself by attaching the number of EMAs you want on the chart and then setting their periods to what you want. You can also set different colors for them.

**What are the risks of relying solely on an EMA Ribbon?**

The risks of relying solely on an EMA Ribbon include:

- Without a way to clearly identify and avoid a consolidating market, it can lead to many false signals.
- The entry signals may show up late after the price has moved a significant portion of the targeted move.
- It doesnâ€™t tell you where to place your stop-loss order.

**How can an EMA Ribbon fail to provide accurate signals?**

An EMA Ribbon can fail to provide accurate signals if the market is not trending. The indicator relies on strong trends to provide accurate signals, so when the market is not trending, it may fail to provide reliable signals. In fact, in a non-trending market, the EMAs would crisscross each other, giving too many inaccurate signals.

**How do market conditions affect the EMA Ribbon’s effectiveness?**

Market conditions affect the EMA Ribbon’s effectiveness by determining how the component EMAs move. When the market is trending, the EMAs slope in the trend direction, indicating the direction of the market. When the market is ranging or consolidating, the EMA would crisscross each other several times, giving too many false signals. It is important to avoid such market conditions if you are using the EMA ribbon.

**Can EMA Ribbon be applied to intraday trading?**

Yes, EMA Ribbon can be applied to intraday trading, but you have to create the right trading strategy with it and use it on the right intraday timeframe. Your strategy may be to go long when all the EMAs are aligned to the upside and go short when all the EMAs are aligned to the downside. Your trading timeframe could be the 15-minute or 30-minute timeframe. Backtest your strategy before using it in real time.

**How do you adjust an EMA Ribbon for different markets?**

To adjust an EMA Ribbon for different markets, you need to study the various markets to understand how they move and the trading styles that may suit them. Then, you create the right strategies for the different markets and backtest your system on each of the markets. The results of your backtesting would tell you the parameters to use when adjusting for each market.

**What is the role of EMA Ribbon in risk management?**

The EMA Ribbon does not directly play a role in risk management, as it neither tells you where to place your initial stop loss at entry nor how much your position size would be. However, in a strongly trending market, if you want to trail your profits, you may use the long-period EMA of the ribbon as a guide for your trailing stop.

**How does the EMA Ribbon perform in a bear market?**

The EMA Ribbon does perform well in a bear market if the market is in a strong downtrend for a long time. However, that is not often the case, as bear markets are usually very fast and short-lived such that by the time the EMA ribbon is showing a sell signal, the downtrend may already be ending.

**What does the flattening of the EMA Ribbon indicate?**

The flattening of the EMA Ribbon indicates a weakening in the trend. That is, the trend is no longer as strong as it was before. It could also mean that the market is consolidating, which could be followed by a reversal if there is a crossover, or a continuation of the trend if the ribbon expands again.

**How can beginners practice using the EMA Ribbon?**

Beginners can practice using the EMA Ribbon by creating a demo account and constructing their own EMA ribbon with the parameters they want â€” the number of EMAs, the price type, and the lookback periods for the different EMAs. It is important that they first create a strategy with the indicator and specify the rules of their strategy. That way, they can practice according to their rules.

**What common mistakes do beginners make with EMA Ribbons?**

The common mistakes beginners make with EMA ribbons include:

- Not creating a strategy with clear entry and exit criteria
- Not knowing the right market conditions to use their EMA ribbon system â€” they may use it in ranging markets
- Using the indicator as a standalone strategy, rather than being a part of a robust system
- Not properly defining and managing their risks

**Are there any advanced techniques using EMA Ribbons?**

The advanced techniques using EMA Ribbons include algorithmic trading and portfolio management. EMA ribbons can be used to create algorithmic trading strategies where the strategy entry and exit logic are coded for computer or VPS systems to execute in the absence of the trader.

Another advanced technique is portfolio management and asset rotation where EMA ribbons can be used to select stocks or assets that are strongly trending for trading while rotating out of those that are not trending.

**How do EMA Ribbons help in determining market momentum?**

EMA Ribbons help in determining market momentum by showing when the market momentum is increasing or decreasing through the spacing of its component EMAs. When the spacing between the EMAs is expanding (the shorter-period EMAs are separating from the longer-period EMAs), the market momentum is increasing. Conversely, when the spacing between the EMAs is contracting (the EMAs are getting closer to each other), the market momentum is decreasing.

**What historical data is most useful for EMA Ribbon analysis?**

The most useful historical data for EMA Ribbon analysis is the price data. The indicator is price-based and uses only the price data in its calculation. This is unlike some indicators that either use only the volume data or a combination of the price and volume data.

**How often should the settings of an EMA Ribbon be reviewed?**

How often you review the settings of an EMA Ribbon is up to you and your trading plan. The factors that typically determine the review schedule of any trading system are your trading sample size and how frequently your setup shows up. If you choose a sample size of 30 trades, then after every 30 trades, you should review your trading results to see if you need to tweak the settings of your EMA ribbon system.

**What additional resources are helpful for learning EMA Ribbons?**

Additional resources that could be helpful for learning EMA Ribbons would include trading blogs like the one you are reading now. Others include therobusttrader.com and quantifiedstrategies.com, as well as some trading forums.