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 ribbons can also be used to signal potential trend changes when the price moves through the ribbons, or the ribbons cross each other.
- The trader determines how many MAs are used to create the ribbon, as well as the lookback periods (length) of each ribbon.
- When the price is above the MA ribbon, and the MAs are angled upwards, it helps confirm a rising price.
- When the price is below the MA ribbon, and MAs are angled downwards, it helps confirm a falling price.
- When the ribbon expands it helps confirm a strengthening trend, but when they contract or cross it indicates a pullback phase or reversal.
The Formula for a Moving Average Ribbon is
Moving Average Ribbon=Multiple Simple Moving Averages (SMA)where:SMA=nPrice1+Price2+Price3+⋯Pricenn=Number of periods, and changes for each SMA used
How to Calculate a Moving Average Ribbon
- Determine how many MAs will be used.
- Choose their lengths/lookback periods.
- Calculate the simple moving average for each
What Does a Moving Average Ribbon Tell You?
Moving average ribbons are often made up of six to eight moving averages of different lengths, although some trader may choose fewer or more. Traders often use a simple moving average ribbon that is set at 10-period intervals, such as 10-, 20-, 30-, 40-, 50-, and 60-period moving averages. The interval doesn't need to be 10-periods, it could be five, or 15, any other interval.
The responsiveness of the indicator can be adjusted by changing the number of time periods used in the moving averages, or by changing the type of moving average from a simple moving average (SMA) to an exponential moving average (EMA).
The fewer the number of periods used to create the averages, the more sensitive the ribbon is to slight price changes. For example, a series of 5, 15, 25, 35 and 45-period moving averages will react quicker to short-term price changes than 150, 160, 170, 180-period moving averages. The latter would be favored by a longer-term investor who only wants to highlight major turning points in the asset.
When the price is above the ribbon, or at least above most of the MAs, it helps confirm a rising price trend. MAs that are angled upwards also aid in confirming an uptrend.
When the price is below the MAs, or at least most of them, and the MAs are angled downwards, it helps to confirm a falling price.
Traders can adjust the indicator so that it provides support and resistance areas. Alter the lookback periods of the MAs so that the bottom of the ribbon, for example, provided support to a rising price trend in the past. In the future, the ribbon may act as support as again. The same concept applies to downtrends and resistance.
When the ribbon is expanding, that helps confirm a strengthening trend. For example, during a strong price rise, the MAs will fan out as the shorter MAs pull away from the longer-period MAs.
When the ribbon contracts, that indicates the price has entered a consolidation or pullback phase.
When the ribbons cross, that can indicate a potential trend change. Some traders may wait for all the ribbons to cross to confirm a price reversal, while others may only need to see a few of the MAs cross before taking action.
Moving Average Ribbon Example
The following chart shows an example of a moving average ribbon in the SPDR S&P 500 ETF (SPY).
In the example above, you can identify bullish or bearish trends by looking at when the indicators start to crossover lower or higher, which changes their color from green to red and red to green, respectively, on this charting platform. The widening of the lines suggests that the trend's strength is increasing while narrowing lines suggest that the trend is losing its momentum.
The Difference Between a Moving Average Ribbon and the Guppy Multiple Moving Average
Individual traders will determine how many MAs make up their moving average ribbon, and will also determine the lookback period of those MAs. The Guppy Multiple Moving Average is more structured in that it has a set number of MAs with set lookback periods. While these can still be altered by the trader, the default settings for the Guppy are 12 MAs, with periods of three, five, eight, 10, 12, 15, 30, 35, 40, 45, 50, and 60.
Limitations of Using a Moving Average Ribbon
The more MAs there are on a chart, the harder it becomes to determine which ones are relevant. For example, if a trader is primarily focused on the bottom MA in a rising trend, then the other MAs are just cluttering the chart.
While ribbon contraction, crosses, and expansion can aid in assessing trend strength, pullbacks, and reversals, MAs are always lagging. This means that the price may have already moved significantly before the ribbon signals the price change.
The ribbon may provide support and resistance at times, but not at others. Also, as indicated above, one time the middle of the ribbon may provide support, while the next time it is the top or bottom of the ribbon. When support is broken, and the price has moved through all the ribbons, this would usually be considered a trend reversal, especially if the MAs have crosses each other as well, but such moves don't always result in a price reversal. The pullback may have just been deeper than the MAs, and following the pullback the original trend resumes.