Rainbow Charts Technical Analysis & Rainbow Charts Signals

Created and Developed by Mel Widner

This is a price trend following indicator, similar to the moving averages MAs - it is drawn using a two period simple moving average MA. The MA is then smoothed to create a total of ten MAs Moving Averages. First moving average MA is the basis, then the next moving average MA 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 trend, each moving average is applied with a different colours so as to look as a rainbow.

Technical Analysis & Generating Signals

Bullish Trend/ Upward Trend

When the prevailing market trend is upward (bullish), the Rainbow indicator lines will be oriented upwards. In this scenario, the line with the least smoothing - which is the red line - will reside at the uppermost extremity of the indicator, while the most significantly smoothed line, the violet, will settle at the opposite, lower boundary of the technical indicator.

Bearish Market/Downward XAUUSD Trend

When the trend is a decline, the lines of the rainbow charts will be oriented downwards, with the most significantly smoothed line (Violet) situated at the bottom and the least smoothed line, Red, positioned at the top.

Trend Continuation Signal

As the trend continues in one direction upward or downward, the rainbow charts follow the price closely. The more the price moves away from the rainbow chart the more the market trend is likely to continue, this is considered as a trend continuation trading signal. The indicator lines also will continue to expand its width: this is also another trend continuation signal.

Trend Reversal Trade Signal

Price nearing the rainbow lines hints at a trend flip. The lines narrow too, as another reversal clue. Confirm the shift when price cuts through all lines. The lines then turn in the new direction.

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