If there’s one thing you’ve surely learned throughout your TradeGeek journey, identifying market trends is how to profit from forex trading.
One of the advanced yet intuitive tools that traders use to analyze trends is the Moving Average Ribbon.
This technique provides visual insights into market dynamics and helps traders identify potential entry and exit points.
In this lesson, we will explain moving average ribbons, how to use them, and provide practical examples to enhance your trading strategy.
A moving average ribbon consists of multiple moving averages (MAs) plotted on a chart simultaneously, each with a different period.
Plotting multiple moving-average lines is a ribbon-like indicator that forms through the interaction of the moving averages.
Generally, this indicator provides valuable insights into the spectrum of price trends over various timeframes or periods.
Typically, traders use exponential moving averages (EMAs) because they are more sensitive to recent price changes, but simple moving averages (SMAs) can also be applied.
Related: TradersUnited – Using Moving Averages as Dynamic S/R Levels
Here are the three primary values that MA Ribbon provides to traders:
Moving average ribbons share a lot of value with traders who want a smooth visual representation of the market trend. Fortunately, setting these ribbons up and using them is straightforward – even the most beginner traders can set them up to their trading chart.
However, remember that you must have access to a platform chart to set up these ribbons.
Again, you need access to a charting platform to gauge the forex trend using a moving average ribbon.
If you don’t have a trading account yet, free (or freemium) charting software, like TradingView, is available online. These applications provide access to the forex chart; however, you cannot execute buy and sell orders through them—you must have a brokerage account to do so.
The next step is to determine which currency pair you want to analyze.
It could be based on your investment portfolio or the recent economic news. If you plan to trade the currency pair, ensure its volatility aligns with your risk tolerance and investment goals.
Active currency pairs like the majors and popular minors (EUR/GBP, EUR/JPY.EUR/CFH) tend to bring the fluctuation short-term traders need to profit significantly from the market.
On the other hand, inactive pairs like obscure crosses (AUD/CHF, AUD/NZD, CAD/CHF) and exotics tend to be illiquid and extremely non-volatile. While it presents stability and safety, trading these pairs is unprofitable and unproductive. Be mindful when you decide to invest in these pairs.
Next, plot various MAs to your trading chart to create the ribbon-like indicator.
There’s no definite rule regarding the number of MAs to use; however, they should periodically vary.
The ribbon's essence is to make the MA signal more actionable and reliable due to the supplementary MAs. Technically, the price interaction with the ribbon is considered more reliable due to multiple and periodically different moving averages.
Here are the market signals based on the price and MA ribbon interaction:
| Price/Ribbon Interaction | What Happened to The Market? | Signal |
| Price moving below the ribbon | The price is trading relatively lower than its periodic average | Downtrend |
| Price moving above the ribbon | The price is trading relatively higher than its periodic average | Uptrend |
| Price and the ribbon are moving in the same direction | The price is trading on an established trend movement | Strong trend consolidation |
Read more: TradersUnited – Use Moving Averages Crossovers to Enter Trades
After plotting multiple MAs, color-code them based on their period or time frame.
Color-coding the lines helps you analyze and better interpret the prevailing market trend based on its historical movement.
Short-term MAs tend to move faster and looser than the long-term ones. If you notice an inconsistency in the supposed movement of the MAs, a reversal is likely to happen.
It also helps you understand the sequential movement of the moving averages. A set of MAs should move according to their timeframe – if it’s a short-period MA, it must move above the longer ones.
Now, let’s dive into the actual analysis and interpretation of the trend using the moving average ribbon.
Here are the steps to make sense of the prevailing trend through the multiple moving averages.
First, let’s understand the implication of the interaction between the price and the ribbon. Technically, it informs us about the potential market movement and its underlying strength.
An upward-sloping ribbon with lines stacked sequentially (shorter periods over longer periods) signals an uptrend market.
Conversely, a downward-sloping ribbon with shorter periods moving below longer periods signals a potential bearish trend.
Suppose you’re analyzing the EUR/USD 1-hour chart.
A bullish trend will likely happen if the 10-, 20-, and 30-period simple moving averages (SMAs) are moving above the 40-, 50-, and 60-period SMAs.
Another value of moving average ribbons is its predictive power in the underlying strength of the trend.
A trader can analyze and interpret the strength of trends through the spacing between MAs.
Say you’re analyzing the GBP/USD daily chart and see a ribbon with every spaced line and a shard slope. However, you noticed that the lines are compressing over time. With this, you can assume a market reversal is likely to happen.
Trend reversals are among the most profitable market environments for forex traders. Why? Simple – it allows you to enter the market during the emerging trend.
Ultimately, this maximizes the potential return if you analyze the market correctly.
Also, spotting trend reversals is an integral exit strategy as it informs you about the trend’s turning point. In other words, it allows you to find a profitable exit point to lock in your profits.
On the USD/JPY 4-hour chart, if the 10-period EMA crosses below the 50-period EMA within the ribbon, it could signal a shift to a bearish trend.
Moving average ribbons exudes objectivity with its sole reliance on historical price actions.
However, its objectivity doesn’t guarantee its accuracy. Like any indicator, no one should treat the moving average ribbon as an ultimate indicator of market price movement.
Consider employing a multi-indicator approach to combat its susceptibility to providing false signals.
Analyzing the market with multiple indicators is profitable as it lets you see the bigger picture of the prevailing market trend.
Here are the three technical indicators best used with moving average ribbons.
Relative Strength Index (RSI) considers the speed of the historical price action to identify the strength of the market.
With RSI, you have a reference to the prevailing market conditions – whether it’s overbought or oversold.
These conditions ultimately inform you about the psychology of bulls/bears and how they affect the market movement.
You have an enhanced trend identifier and a stronger reversal signal when used with MA ribbons.
The support and resistance (S/R) levels are undeniably the most popular indicator of the market movement. These two levels act as the price’s floor and ceiling, restricting it from moving beyond such barriers.
These levels are key indicators of potential market reversals.
The support level (floor) carries the market pressure prohibiting the price from moving below it. This market zone is concentrated on buying pressures from pending long orders.
On the other hand, the resistance level (ceiling) is a selling pressure-filled zone. Thus, a price approaching or touching this level is expected to decline.
The candlestick patterns are the easiest technical indicators to spot. Overall, it’s the indicator that provides the most visual clarity in the market.
Candlestick is a charting tool that visually informs you about the market's close, high, low, and open prices. Additionally, these candles are color-coded depending on the trend during the period – they’re red or black if the market is bearish; while green or white candles indicate a bullish market.
When using the moving average ribbons, consider the following patterns to confirm the signal:
Finally, analyzing the market ribbon with candlesticks reduces market noise that hinders you from identifying the primary market trend. In other words, it helps you see the bigger picture of the market.
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