Exponential Moving Average Ribbon (EMA Ribbon)

By Samantha Baltodano

TL;DR:

The EMA Ribbon study consists of 8 Exponential Moving Average plots of different lengths that form a “ribbon”. Crossovers of the moving averages indicate buy or sell signals.

What Is the Exponential Moving Average Ribbon (EMA Ribbon) Study?

The Exponential Ribbon Moving Average study consists of a combination of 8 Exponential Moving Averages of different lengths plotted on the same graph. When plotted, these moving averages form a “ribbon”.

When the longer-term moving averages are moving in parallel with one another this indicates a strong trend. For example, all long-term averages moving upward is a strong indicator of a bullish trend. Conversely, all long-term averages moving downward is a strong indicator of a bearish trend. 

When the moving averages begin to converge and fluctuate around each other this is a sign of trend weakness, meaning the current trend is likely reverting.

In times of short-term trend reversal, only the short-term averages crossover, diverge and then converge again, while the long-term averages remain parallel.

Different variations of the EMA Ribbon study exist, wherein users adjust the number of moving averages plotted (6-16) or change the type of moving average used (Simple Moving Average). 

Likewise, the lengths of the moving averages vary based on the time horizon and investment objectives.

Buy and Sell Signals

Traders typically interpret buy signals as they would with other Moving Average crossovers - the faster moving average crossing over the slower moving average.

The difference is because there are multiple moving averages involved, there are also multiple crossovers. The study requires traders to make the decision as to how many crossovers must occur before a buy signal is triggered.

Similarly, a sell signal is given for the EMA Ribbons when the faster moving averages cross below the slower moving average.

In the example below, a buy signal is given only when all faster moving averages (10, 20, 30, 40, 50, 60, 70-day) cross over the slowest moving average (80-day). The sell signal goes off when all fast moving averages cross below the slowest moving average.

Source: Commodity.com

Figure 1: EMA Ribbon crossover

Summary

• 8 EMA are plotted to form the EMA Ribbon study.
• There are different variations of EMA Ribbon that increase or decrease the number of averages (6-16) or change the type of moving average used (Simple Moving Average).
• When the longer-term moving averages are moving in parallel with one another this indicates a strong trend. When the moving averages begin to converge and fluctuate around each other this is a sign of trend weakness, meaning the current trend is likely reverting.
• Buy signals occur when the faster moving averages crossover the slower moving averages.
• Sell signals occur when the faster moving averages cross below the slower moving averages.

Exponential Ribbon Moving Average is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.

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