Rainbow Charts Technical Analysis and Rainbow Charts Signals
Created by Mel Widner
This is a trend following indicator, similar to the MAs - it's plotted using a 2 period simple Moving Average. The MA is then smoothed to create a total of ten MAs. The first MA is the basis, then the next MA is calculated using the first one, the third is then calculated using the second one & so on. This forms a rainbow shape of the currency trend, each MA is applied with a different colors so as to look as a rainbow.
FX Analysis & How to Generate Signals
Bullish Trend/ Upward Trend
When the trend in the 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 & the major smoothed line will be at the bottom of the indicator, this is the violet line.
Bearish Market/Downward Trend
When the trend is a bearish downward then the rainbow charts will be heading downward, the major smoothed line (Violet) will be at the bottom & the least smoothed line (Red) will be 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 trend is likely to continue, this is considered as a trend continuation signal. The indicator lines also will 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. The width of the indicator lines also contracts signifying a trend reversal. The reversal Signal is confirmed when price penetrates through all the rainbow charts & the direction of the rainbow charts also reverses in their respective direction.
