Rainbow Indicator is basically a Multi Moving Averages combination. It is called rainbow because every period is displayed in a different colour in order to enhance it’s visual approach on the chart.
Take a look at the chart below:
You can easily note that there are two areas where all the MAs came close to form a really narrow trading range. Both of these consolidation areas lead to breakout points and a change in the trend.
Rainbow indicator is a trend-following indicator. That makes the Rainbow Strategy to be very choppy when markets are moving sideways. On the other hand, Rainbow strategy can generate very profitable signals during trending periods. It can be used with any timeframe and any currency pair.
Rainbow Indicator Explained
When the trend is bullish, the shortest period line (yellow) is at the top of the Rainbow and the longest period line (violet) is at the bottom of the Rainbow. When the trend is bearish the order of the Rainbow is reversed.
Rainbow Trading Signals
- Go Long when the yellow lines cross above the violet ones! All the MAs must head up.
- Go Short when the yellow lines cross below the violet ones! All the MAs must head down.