DEFINITION of Moving Average Ribbon
Moving average ribbons are a series of moving averages 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 smoothness of the ribbon, as well as identify key areas of support or resistance by looking at the price in relation to the ribbon.
BREAKING DOWN Moving Average Ribbon
Moving average ribbons are often made up of six to eight moving averages of different lengths. Most often, traders use simple moving average ribbons that are set at 10-period intervals, such as the 10-, 20-, 30-, 40-, 50-, and 60-day moving averages.
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 shorter the number of periods used to create the average, the more sensitive the ribbon is to slight price changes. For example, a series of 5, 15, 25, 35 and 45-day moving averages will be a better choice to find short-term reversals then 150, 160, 170, 180-day moving averages.
Traders may choose to enter or add to positions when the price pulls back during an uptrend to longer-term moving averages. Of course, short-sellers could choose to do the same when the price is trending lower and the price rises to a long-term moving average. Moving average ribbons can also be used as a reversal indicator: When the moving average lines converge, it can be a sign of a pending longer-term breakout or breakdown.
Moving average ribbons are often used in conjunction with other forms of technical analysis to improve the odds of success. For example, traders may identify a downtrend using moving average ribbons, but avoid selling out of their long position until confirming a reversal has taken place using technical indicators or chart patterns.
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 easily 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. The widening of the lines suggests that the trend's strength is increasing, while narrowing lines suggest that the trend could be losing some of its momentum.
Chart courtesy of TradingView.com.