Rainbow Charts Forex Technical Analysis and Rainbow Charts Forex Trading Signals
Developed by Mel Widner
This is a trend following indicator, similar to the moving averages - it is plotted using a 2 period simple moving average. The moving average is then smoothed to create a total of ten moving averages. The first moving average is the basis, then the next moving average is calculated using the first one, the third is then calculated using the second one and so on. This forms a rainbow shape of the currency trend, each moving average is applied with a different colors so as to look as a rainbow.
Forex Technical Analysis and Generating Forex Trading Signals
Bullish Trend/ Upward Trend
When the trend in the Forex market is Upward/bullish trend, then the rainbow will be moving upwards, the least smoothed line will be at the top of the indicator, this is the red line and the major smoothed line will be at the bottom of the indicator, this is the violet line.
Bearish Market/Downward Trend
When the Forex trend is a bearish downward then the rainbow charts will be moving downwards, the major smoothed line (Violet) will be at the bottom and the least smoothed line (Red) will be at the top.
Trend Continuation Signal
As the trend continues in one direction up or down, the rainbow charts follow the price closely. The more the price moves away from the rainbow chart the more the trend is likely to continue, this is considered as a trend continuation signal. The indicator lines will also continue to expand its width; this is also another trend continuation signal.
Trend Reversal Signal
When price starts moving towards the rainbow charts then this is seen as a trend reversal signal. The width of the indicator lines also contracts signifying a trend reversal signal. The reversal Signal is confirmed when the price penetrates through all the rainbow charts and the direction of the rainbow charts also reverses in their respective direction.