Wrapping Moving Averages With Ribbons

FIGURE 1: DETECTING TRENDS. When using two moving averages, a buy signal is generated when the short-term moving average (20-period MA) crosses over the long-term MA (50-period).

BIGGER IS BETTER
If using two MAs is better than using one, wouldn't three or more be even better? Many traders think so and use three or more. At some point in trading history, someone reasoned that using many more averages to monitor trend activity is best. This is when the MA ribbon was created and is preferred by some traders who use 10 or more moving averages to form a ribbon that fluctuates with changing trends and market extremes. An MA ribbon typically uses averages between the 50- and 200-period MAs in 10-period increments for monitoring long-term trends.

1. When the 50-period MA crosses over the 200-period MA, it is likely that other MAs will follow. As a result, a fold in the ribbon is created, forming a reversal of their order and momentum.
2. When the spaces between the moving averages are spread apart equally, the trend is strong.
3. When the spaces between the moving averages widen, it suggests that a market extreme is occurring. This usually indicates that a sudden movement is about to occur in the opposite direction.
4. When the spaces between the moving averages begin to become narrow and constricted, prices are ranging.

FIGURE 2: FOLDS AND FANS. A fold in the ribbons indicates a reversal is likely; when spaces between moving averages (MAs) are spread apart equally, the trend is strong; when spaces between MAs widen, it suggests a market extreme; and when spaces between MAs become narrow and constricted, it suggests that prices are ranging.

One practice shown in Figure 2 that can help with viewing an MA ribbon is to make the 50-period MA a different shade or color from the other lines. When prices are ranging, showing narrow bands, it is easier to see if the 50-period band is going to cross or remain below the other averages, giving a hint of where the breakout or pullback might occur. If other MAs follow, then it is likely that momentum will increase in that direction.

Short-term moving average ribbons can also be useful. The nice thing about using MA ribbons is that the averages can be any combination you choose. They are usually between zero and 50. One useful combination might be the 5-10-15-20-25-30-35-40, such as what you see in the daily chart of the US dollar index in Figure 3. You could also use other combinations such as 5-10-20-30-40-50. As you may have already suspected, these behave similar to long-term MA ribbons, but they are more sensitive to price changes and react to them sooner. This is helpful in determining short-term entries and exits.

FIGURE 3: SHORT-TERM MOVING AVERAGES. This combination of MAs is usually between zero and 50. Here you see a 5-10-15-20-25-30-35-40 combination of MAs. These MAs closely follow price and are more sensitive to price changes.

FIGURE 4: LONG-TERM MOVING AVERAGES. Here, the long-term MAs are displayed in green, making it easy to identify when short-term MAs cross into long-term territory.

FURTHER READING

• Tintelnot, Bruce [2013]. "Position Size And Profitability," Working-Money.com, July 31.
• _____________ [2013]. "Placing Stops With Moving Averages And Bollinger Bands," Working-Money.com, March 13.

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