Moving Average Ribbon – Strategy And Rules

Navigating the randomness of financial markets can be daunting, even for seasoned traders, but there are technical analysis tools and indicators that can help you find your path — one such indicator is the moving average ribbon. What do you know about this indicator?

A moving average ribbon is a technical analysis tool that consists of a series of moving averages of different lengths plotted on the chart, giving a ribbon-like appearance, with shorter-period moving averages lying closer to the price and longer-period moving averages staying further away from the price. The indicator is used 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 moving average ribbon: what it is, how it works, and how you can improve your trading strategies with it. Read on!

Key takeaways

• A moving average ribbon is a technical analysis tool consisting of multiple moving averages.
• Typically, it uses 6 to 12 (or more) moving averages with varying lookback periods.
• These moving averages create a ribbon-like visual on the chart.
• Shorter-period moving averages stay closer to the price, while longer-period MAs remain further away.
• The MAs can be simple (SMAs), exponential (EMAs), or weighted (WMAs).
• The indicator helps identify trends, trend strength, trend reversals, and potential trading opportunities.
• More indicators if you click here: top trading indicators

What is a Moving Average Ribbon?

A moving average ribbon is a technical analysis tool that consists of a series of moving averages — often 6 to 12 or more — of different lookback periods plotted on the chart. The bunch of moving averages on the chart creates a visual appearance of a ribbon, with shorter-period moving averages lying closer to the price and longer-period moving averages staying further away from the price. The moving averages (MAs) can be simple moving averages (SMAs), exponential moving averages (EMAs), or weighted moving averages (WMAs).

The indicator is used to identify trends, the strength of a trend, trend reversals, and potential trading opportunities. The slope of the moving averages and where the price is relative to them generally indicate the direction of the trend, while the distance between the moving averages can be used to gauge the strength of the trend. The longer-period moving averages can serve as dynamic support and resistance zones, while the crossovers may indicate a potential change in trend direction.

Moving Average Ribbon trading strategy – rules, settings, and returns

A backtested strategy is coming shortly.

How does a Moving Average Ribbon work?

A moving average ribbon works by plotting a series of moving averages (say 6) of different lookback periods and using their slopes, positions, and the position of the price relative to them to assess the trends and spot potential trading opportunities. While the ribbon can come as a single indicator with a specified number of MAs it can plot on the chart, traders can create their own MA ribbon by attaching multiple MAs of different periods on their charts.

In fact, creating the MA ribbon on their own allows them to choose how many MAs to have, the type of MA (SMAs, EMAs, or WMAs) to use, and the lookback periods of each MA. These are factors that determine how responsive or sensitive the ribbon would be — the shorter the length of the lookback periods used to create the averages, the more sensitive the ribbon would be to price changes. For instance, an MA ribbon series of 8, 16, 24, 32, 40, and 48-period MAs will be more sensitive to price changes than that of 80, 88, 96, 104, and 112-period MAs.

Why use a Moving Average Ribbon in trading?

The reason to use a moving average ribbon in trading is that it gives a visual representation of the different trends in one short — the longer-period MAs show the situation of the long-term trend, while the shortest-period MAs show that of the short-term trend. When the spacing between the short and long-period MAs is expanding, the trend is strong, while a contraction of the spacing indicates price consolidation. Also, the long-period MAs can serve as a dynamic support zone in an uptrend and as a dynamic resistance zone in a downtrend.

What are the key components of a Moving Average Ribbon?

The key components of a moving average ribbon include the following:

• The type of moving average: This refers to the method of moving average to use in the ribbon. Any of the major types of moving averages, such as the SMA, EMA, or WMA can be used. While the SMA and EMA are commonly used, some traders also use the WMA. It is even possible to use a combination of different MA types.
• The number of moving averages: How many MAs to use in the ribbon matters. It can be as few as six or as many as over 12. However, more is not always better. What matters is to have MAs of varied lookback periods such that they can show both long-term and short-term trends.
• The lookback period of each moving average: The lookback period determines the sensitivity of the ribbon — the shorter the length of the lookback periods used to create the averages, the more sensitive the ribbon would be to price changes.

How is a Moving Average Ribbon constructed?

A moving average ribbon is constructed by attaching multiple moving averages on the chart — usually about 6-12 of them. The moving averages can be of the SMA, EMA, or WMA type, or even a combination of them. However, SMA-based and EMA-based ribbons are the most commonly seen.

If you want to use SMAs, for example, you may choose to have 8 SMAs, with a 20-period interval between the MAs. Your first MA could be a 21-period SMA, and the second will be a 41-period SMA. Subsequent ones will be 61-period, 81-period, 101-period, 121-period, 141-period, and 161-period SMAs.

You may choose to color-code each MA or give them one color for an uptrend and another color for a downtrend. After plotting the moving averages, the ribbon may look like this:

What are the best settings for a Moving Average Ribbon?

The best settings for a moving average ribbon will depend on your trading strategy and the market you are trading. Your strategy and trading style will determine how much lookback period to use and the type of MA. A position trader may want to use longer periods, while a day trader may use shorter periods so the ribbon can be more sensitive to minor price changes. You may have to experiment with different periods for the different constituent SMAs to know what works best for your strategy and the market you are trading. Backtest thoroughly and evaluate the performance along the way.

How do you interpret a Moving Average Ribbon?

To interpret a moving average ribbon, you have to consider the position of the price relative to the MAs, the slope of the MAs, and a crossover between the shorter-period and longer-period MAs. When the MAs are sloping upwards and the price is above the MA ribbon, there is likely an uptrend. The opposite is true for a downtrend. Also, the shorter-period MAs are above the longer-period MAs in an uptrend and below in a downtrend.

The spacing between the shorter-period and longer-period MAs indicates the strength of the trend. So, when the spacing is expanding, the trend is strong, and when the spacing is contracting, the market is either pulling back or consolidating. The crossovers of the MAs usually indicate a change in trend.

What trends can a Moving Average Ribbon identify?

The trends a moving average ribbon can identify will depend on the lookback periods of the constituent MAs in the ribbon. A ribbon with long lookback periods, such as a 100-period or 200-period MA, can show long-term trends, especially when used on higher timeframes. For example, a 200-day or 200-week SMA can show pretty long-term trends. On the other hand, a ribbon with a maximum of 50-period MA can at best show a medium-term trend, in addition to the short-term trends shown by short-period MAs in the ribbon.

How does a Moving Average Ribbon help with market analysis?

A moving average ribbon can help with market analysis by showing you the direction of the trend, the strength of the trend, and potential trend reversals. The slope of the MAs and the position of the price relative to the MAs can help you identify the direction of the trend — when they’re up, the trend is up, and when they’re down, the trend is to the downside. The expansion of the spacing between the MAs indicates a strong trend, while the contraction shows a weakening trend. MA crossovers following a prolonged trend may indicate a potential reversal.

Can a Moving Average Ribbon predict market reversals?

Yes, a moving average ribbon may be able to predict market reversals. This is shown by the shorter-period MAs crossing over the longer-period MAs. When the short-period MAs cross above the long-period MAs after a prolonged downtrend, it could be that the market is reversing to the upside. Conversely, when the short-period MAs cross below the long-period MAs after a prolonged uptrend, it could be that the market is reversing to the downside.

What are the advantages of using a Moving Average Ribbon?

The advantages of using a moving average ribbon include the following:

• It can show the direction of the trend — the shorter-period MAs show the short-term trend, while the long-period MAs show the long-term trend.
• It can be used to gauge the strength of the trend — expansion of the spacing between MAs shows increasing strength of the trend.
• It may show market reversals — the moving average crossovers may indicate trend reversals
• The long-period MAs may serve as dynamic support zones in an uptrend and resistance zones in a downtrend.

What are the limitations of a Moving Average Ribbon?

The limitations of a moving average ribbon include:

• The multiple moving averages can be distracting to a serious trader, especially someone who wants to see more of the price action.
• They can lead to analysis paralysis, as you may not know which MA to focus on.
• Moving averages are generally lagging and cannot have any predictive value — it’s the price movements that lead the MA movements, not the other way around.
• It’s prone to late entries when used to identify entry setups.

How do you customize a Moving Average Ribbon?

To customize a moving average ribbon, you have to create your own by yourself, rather than use an MA ribbon indicator. When constructing your own MA ribbon, you can choose how many moving averages you want to have on your chart and the type of MA to use. You can use the SMA, EMA, WMA, or even a combination of them. Creating your own custom MA ribbon also allows you to choose the lookback periods you want for the MAs — you may prefer more longer-period MAs than short-period ones.

Which timeframes work best for a Moving Average Ribbon?

The timeframes that work best for a Moving Average Ribbon will depend on the result of your backtesting and your trading style. If you are a scalper, you may be looking for trade setups on the 5-minute and 1-minute timeframes or even the tick chart. Likewise, if you’re a day trader, your focus would be on the hourly, 30-minute, or 15-minute timeframes. You will find the particular timeframe that works best for each trading style from backtesting.

How does a Moving Average Ribbon differ from a single moving average?

A moving average ribbon differs from a single moving average in that it consists of a series of moving average lines of different lookback periods, while a single moving average plots only one line on the chart. With a moving average ribbon, you can gauge the trend’s strength and observe market consolidations, but you can’t do that with a single moving average. A ribbon also offers moving average crossovers, which a single MA cannot show.

What is the significance of the spacing in a Moving Average Ribbon?

The significance of the spacing in a Moving Average Ribbon is that it can tell you something about the strength of the trend. When the spacing is expanding, it shows that the market is trending strongly, as the shorter-period MAs pull away from the longer-period MAs. When the spacing is contracting — that is, the MAs are getting closer to each other — it means that the trend is no longer strong, as the market is either pulling back or consolidating.

How do you use a Moving Average Ribbon in day trading?

To use a moving average ribbon in day trading, you must first create a reliable strategy with it. The strategy could be to go long when all the MAs are aligned to the upside and go short when all the MAs are aligned to the downside. You have to choose the right timeframe to execute the strategy, but you must backtest it to be sure it has an edge in the market.

Can a Moving Average Ribbon be used for swing trading?

Yes, a moving average ribbon be used for swing trading if you create the right swing trading strategy and trade on the right timeframe. Your strategy could be to go long on the H4 timeframe when the shortest-period MA falls below the long-period MA and crosses back up — the opposite will qualify for a short position. The most important thing is to backtest the strategy and be sure it has an edge in the market you’re trading before deploying it.

How do you set up a Moving Average Ribbon on trading platforms?

To set up a moving average ribbon on trading platforms, you have to first check whether the indicator is among the built-in indicators on the trading platform you are using — most likely, it is not unless your trading platform is TradingView. So, you have to construct it yourself by attaching the number of MAs you want on the chart and then setting their periods to what you want. You can also set different colors for them.

What are common mistakes when using a Moving Average Ribbon?

The common mistakes when using a moving average ribbon include:

• Thinking that the market trends all the time or that a trend has no end, so you don’t close your positions in time
• Using it to trade in a range-bound market — as a trend-following system, it performs poorly in a ranging market
• Using the indicator as a standalone strategy — it must be used as a part of a robust system
• Not defining and managing their risks properly

How does market volatility affect a Moving Average Ribbon?

Market volatility affects a moving average ribbon in different ways. It depends on whether the market is trending in a particular direction or consolidating. In a strongly trending market, increasing volatility means that bigger price moves. In such situations, the spacing between the MAs widens, as the shorter-period MAs react faster to the price move. In a consolidating market, on the other hand, increasing volatility means non-directional price spikes, which is very bad for the moving average ribbon.

What other indicators complement a Moving Average Ribbon?

Other indicators that can complement a moving average ribbon include oscillators and volume indicators. Oscillators, like the RSI and stochastics, can be used to spot price swings in a trend. So, they can be combined with the MA ribbon, where the ribbon is used to identify the trend and the oscillator is used to spot entries after a pullback. Volume indicators can also complement the MA ribbon, especially when trading stocks and other assets with real volume data.

Can a Moving Average Ribbon improve trading performance?

Yes, a moving average ribbon can improve trading performance if used as a part of a reliable trading system with an edge in the market. You can use the ribbon to identify trends and gauge the strength of the trend, as well as mark dynamic support and resistance levels. For a trend-following strategy, the ribbon may be a guide for a trailing stop.

What are real-life examples of successful Moving Average Ribbon strategies?

Here are a few real-life examples of successful moving average ribbon strategies:

Example 1: A long position in an uptrend:

In the AMD chart below, you can see when the shortest-period (the fastest) MA crossed above the rest of the MA. That could be an entry for a trend-following strategy. See how the market trended upwards thereafter.

Example 2: A short position in a downtrend:

In the same AMD chart — see below — you can see when the shortest-period (the fastest) MA crossed below the rest of the MA, indicating a resumption of an existing downtrend. That could be an entry for a short position.

How do experienced traders use a Moving Average Ribbon?

Experienced traders use a moving average ribbon to identify strongly trending markets and trade in that direction. The MA ribbon is suitable for trend-following traders who can enter a trade and choose to ride their profits till the trend ends. Such traders can use the MA ribbon to guide their trailing stop when riding a trend. Some may use it to only identify relatively strong trends and use other tools to swing trade in that direction.