Follow Moving Ribbon Strategy To Focus on the focus on the Inter-temporal Relationships Between Shorter and Longer Price Trends
One of the frequently used strategies by the traders is Moving ribbon strategies that mainly focus on the inter-temporal relationships between shorter and longer price trends. The analysts of Money Classic research completely rely on ribbons to identify turning points, continuations and overbought/oversold conditions. It also defines areas of support and resistance and measures price trend strengths.
Many analysts believe that moving average ribbons are very simple to create and interpret. It is defined by its characteristic three-dimensional shape that seems to flow and twist across a price chart. This strategy is said to be the extreme extension of the multiple moving average strategy. The overall functionality of the moving ribbon is dependent on the time intervals defined for the separate moving averages.
In order to construct a moving average ribbon, you need to plot a large number of moving averages of varying time period lengths on a price chart at the same time. Some of the common parameters include eight or more moving averages and intervals that range from a two-day moving average to a 200- or 400-day moving average. It is suggested by the veteran technical analysts that for ease of analysis you must keep the type of moving average consistent across the ribbon. You can keep all the exponential moving averages for example.
All of the moving averages converge into one close point on the chart, when the ribbon folds and simultaneously the trend strength is likely weakening and possibly pointing to a reversal. When the moving averages are fanning and moving apart from each other, then the opposite is true. It suggests that prices are ranging and that a trend is strong or strengthening.
You will notice here that the downtrends are highlighted by shorter moving averages crossing below longer moving averages. Conversely, Uptrends show shorter moving averages crossing above longer moving averages. Here, the short-term moving averages act as leading indicators that are confirmed as longer-term averages trend towards them.