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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 color 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 colorful EMAs make a rainbow over the chart, thus a name.
Key Takeaways🔑
| →The rainbow pattern uses three different EMA periods for market analysis. |
| →Entry signals can be deduced based on the intersections of the EMA lines. |
| →It’s important to use your own analysis alongside this pattern for effective trading. |
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 order.
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.
Good luck!
Pros and Cons of the Rainbow Pattern 🌈
Pros:
- Simple and easy to understand, even for beginners. 😃
- Provides visual representation of the market trends. 📈
- Useful in spotting potential entry and exit points. 🎯
Cons:
- Doesn’t take into account other important market factors. 😔
- May lead to false signals in highly volatile markets. ⚠️
- Requires manual adjustment of periods and colors. 🎨
| EMA Line | Role in Trading |
|---|---|
| Blue EMA6 | Reflects the most recent price changes, often the first to cross during trend changes. |
| Yellow EMA14 | Acts as a middle ground, provides balance between recent and older price changes. |
| Red EMA26 | Reflects older price changes, usually the last to cross during trend changes. |
Q&A About the Rainbow Pattern 🙋♂️
Q1: Why does the rainbow pattern use different periods?
A: The different periods are used to track different stages of the market trend – short term (Blue EMA6), intermediate term (Yellow EMA14), and long term (Red EMA26).
Q2: How do I know when to enter a trade using the rainbow pattern?
A: The common signal for trade entry is when the Blue EMA6 line crosses the Yellow EMA14 line. However, make sure to combine this with your own market analysis.
Q3: Can the rainbow pattern be used for all types of assets?
A: Yes, the rainbow pattern can be used for any asset as long as the price data is available. However, its effectiveness may vary based on the asset’s volatility.
Q4: Can I use other EMAs with the rainbow pattern?
A: Yes, you can modify the EMA periods based on your trading strategy, but this might alter the effectiveness of the traditional rainbow pattern.
Q5: How accurate is the rainbow pattern?
A: Like all trading patterns, the rainbow pattern is not 100% accurate and should be used in conjunction with other trading strategies and indicators.