A host of technical tools are used to predict future foreign exchange movements and decide upon signals related to buy, sell or hold. Some indicators are based on price, some takes price and time into consideration, and few focus only on volume. In this article we will discuss about moving average exponential Ribbon indicator that is used for Foreign Exchange market predictions.
Define MA Exponential Ribbon:
This indicator is based on the simple concept of plotting various (more than 01) exponential moving averages of increasing time period. All the EMA are plotted on a single graph. The period and length of EMA depends on the requirement of the trader, and sometimes the trader prefers to plot simple moving average instead of exponential moving average for analytical purposes. In recent times it is becoming more and more popular among traders that are studying trends in the foreign exchange market. Normally a Foreign Exchange trend trader studies 12 to 16 EMA on a ribbon indicator to get the actual clue.
Building EMA Ribbons:
It is very important for the trend trader to build this indicator well on the chart. For this he requires equal number of short term and long term EMA, for example if he is plotting 8 short term EMA, then the number for long term EMA should also be 8. Important point for consideration here is that the short term EMA are mostly dependent of time frame that the trader is using for analysis. Thus this gives a clear picture related to breakouts, trend continuations or reversals etc. the indicator normally generates three important signals. Firstly, it shows a strong trend when the ribbons start becoming parallel and move in agreement with other signals. Here ribbons move evenly and collectively. Secondly, Foreign Exchange market extremes are observed when the ribbons start separating from each other. Here it is assumed that the existing trend is going to finally end. Lastly, new trend is identified when; the ribbons start to converge slowly. Here long term ribbons are converging slowly to new trends, while the short term ribbons are converging faster.
Identifying the Buy Signal in Foreign Exchange:
Here identifying the buy signal is very similar to moving average crossovers. The only difference between the two is that, here since multiple EMA are plotted hence, traders observe multiple crossovers. Decisions related to buy and sell are based on the number of crossovers that happen before final trigger signal.
Understanding the sell signal:
The sell signal in moving average exponential ribbon indicator is based on the principle of total number of crossovers that are happening before final trigger signal that the trader has set. Thus, decisions related to trade are taken only after observing all crossovers that are occurring in the chart for the desired time frame.
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