Rainbow Charts Analysis and Rainbow Charts Trading Signals
Created and Developed by Mel Widner
This is a market trend following indicator, similar to the moving averages - it's drawn using a two period simple moving average. The Moving Average is then smoothed out 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 market trend, each moving average MA is applied with a different colours so as to look as a rainbow.
Index Analysis & How to Generate Trading Signals
Bullish Trend/ Upwards Trend
When the trend in the market is Upward/bullish trend, then the rainbow will be heading upward, the least smoothed out line will be at the top of the indicator, this is the red line and the major smoothed line , Violet will be at the bottom of the trading indicator, this is the violet line.
Bearish Market/Downward Trend
When the trend is a bearish downwards then the rainbow charts will be moving downward, the major smoothed line (Violet) will be at the bottom and the least smoothed out line (Red) will be at the top.
Trend Continuation Signal
As the market 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 market trend is likely to continue, this is regarded as a market trend continuation trade signal. The indicator lines will also continue to expand its width; this is also another trend continuation signal.
Trend Reversal Signal
When stock price starts moving toward the rainbow charts then this is seen as a trend reversal signal. The width of the indicator lines also contracts signifying a market trend reversal signal. The reversal Signal is confirmed when price penetrates through all the rainbow charts & the direction of the rainbow charts also reverses in the respective direction.
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