Rainbow Charts Technical Analysis and Rainbow Charts Signals
Developed by Mel Widner
This is a price trend following technical indicator, similar to the MAs - it is drawn using a 2 period simple Moving Average. The Moving Average is then smoothed to create a total of ten MAs. The first MA is the basis, then the next Moving Average 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 Moving Average is applied with a different colour so as to look as a rainbow.
Forex Analysis & How to Generate Signals
Bullish Trend/ Upward Trend
When the market trend in the market is Upward/bullish trend, then the rainbow will be heading upwards, the least smoothed line will be at the top of the trading indicator, this is the red line and the major smoothed line will be at the bottom of the technical indicator, this is the violet line.
Bearish Market/Downwards Trend
When the market trend is a bearish downward then the rainbow charts will be heading downwards, 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 upwards 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 market 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 heading towards the rainbow charts then this is seen as a market trend reversal. The width of the trading indicator lines also contracts signifying a market trend reversal. The reversal Signal is confirmed when the price penetrates through all the rainbow charts & the direction of the rainbow charts also reverses in their respective direction.
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