The rainbow pattern overview
The rainbow pattern is a graphical pattern used in market analysis. It consists of three exponential moving averages at a distinct period. When you choose the EMA from the indicators list, its default parameters are period 10 and the colour yellow. Therefore, you must change them manually by clicking a pen icon. The first EMA should be blue with period 6, the second yellow with period 14, and the third red with period 26.
Three colourful EMAs make a rainbow over the chart, thus a name.
Using the rainbow pattern in trading
The important question is what to do with that rainbow? Well, you will have to observe the lines and wait for the entry signals. Many traders agree that the following rules are pretty strong signals the price will fall.
Look at the chart below. First, the blue line with period 6 goes above the others. Below there is a yellow EMA, period 14. At the bottom the red one with period 26 runs.
Then, the blue EMA6 crosses the yellow EMA14. This is considered to be a good entry point for a down position.
Now let’s have a look at the next chart. It shows the signal to enter the trade for the up option.
In the beginning, the red EMA26 is on top of the others. The yellow EMA14 runs in the middle. And below all of them, there is the blue EMA6.
Now, the moment the blue EMA6 intersects the yellow EMA14 is a good entry point for an up trade.
You may want to read about the SMA strategy in the following article about trading SMA strategy.
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