Moving averages are one of the most beloved indicators in all of Forex trading because they are so simple and yet so elegant all at the same time. People who use moving averages get a great sense of where the market has been before, and perhaps where it might be headed next. Thus, they are given the great gift of having some idea of what kind of moves they may need to make in the market to position themselves as comfortably as possible to take advantage of any and all movements going forward.
Given that moving averages are so powerful, doesn’t it just make sense that a good trader would want to use as many of them as humanly possible to obtain a degree of certainty about their market predictions? That is what people who rely on moving average ribbons believe. They see the moving average as a wonderful tool for their use, but they want to maximize its value by using many moving averages all on the same chart.
Simple Or Exponential Moving Average?
Which average should someone use if they are interested in creating a moving average ribbon that they can get some information from? The answer to this depends on exactly which set of information you are most interested in finding. Are you looking for information about the latest movements in the market on a relative basis (i.e. relative to where it has been most recently), or are you okay with basing your trading off the simple moving average of the pair over a period of time? The answer to that question often comes down to your particular trading style and how you like to review information in the market.
There is not a “correct” answer so to speak because there are many schools of thought. However, you can rest assured that the use of either one of these types of moving averages will work just fine. The main point is that you need to get them set up in a ribbon to get the most information possible.
What Can The Ribbons Tell You?
Expanding Moving Average Ribbons
One great use for moving average ribbons is to try to determine when a trend is about to end. If you see an EXPANDING ribbon, then you may be witnessing the end of a particular trend. The expanding ribbon is flashing the bright red sign that prices have reached an extreme, and this is often what happens right before the trend reverses.
If you have been riding the trend on your trade for some time and are looking for an exit point, an expanding ribbon of moving averages is probably the place where you want to bail out. You may be able to exit at just the right time and thus capitalize on as much of the market movement as possible.
Contracting Moving Average Ribbons
A CONTRACTING ribbon is a sign that the trend may be about to reverse. Perhaps you had been riding the currency pair all the way down, but now a contracting ribbon is indicating that the currency pair may be ready to bounce back and start to climb. If that is the case, then you need to get out of the way and either get on the other side of the trade, or at least wait until this cycle is over and find a better entry point.
Parallel Moving Average Ribbons
When the moving average ribbons are PARALLEL and spaced relatively evenly, this indicates that the current trend is strong. All the moving averages are in relative uniformity and are moving together.
The moving average ribbons can help you figure out when the time to get out of a trade is, and there is no more valuable information in the Forex market than that. People always want to know when they are supposed to bail on their trades, and it is often right at the point when it is about to change directions. It is so challenging to determine precisely when that time is, but the moving average ribbons can help make it a bit easier for you to do.