The indicator is a tool that follows trend. It helps traders to visualize a full spectrum of trends in the market. Mel Widner developed the indicator and elaborated it in the 1997 issue of of Stocks and magazine. It uses 10 simple moving averages and hence, it is a very interesting take on a .
The basis of the indicator are 10 moving averages. The first Rainbow Moving Average is a 2-period . It applies recursive smoothing to this first . The first moving average is the base of nine other simple Rainbow Moving Averages of different lengths. Each bases on the previous . The application of the recursive smoothing enables the indicator to create a full spectrum of the current trends in the market. As we know that the financial markets are full of wonders and surprises and we have an indicator that also surprises us. Yes, it is none other than the indicator that presents information on the charts in the form of a rainbow. That is the reason that it is known as the indicator.
The interpretation of the indicator is quite straightforward. The Rainbow Moving Average with the least recursive smoothing stays at the very top of the Rainbow during a in the market. Conversely, the moving average with the most recursive smoothing stays at the bottom of the Rainbow.
On the other hand, the positions of the least and the most smoothed moving averages reverses during a in the market. Now the least stays at the bottom while the most stays at the top of the Rainbow.
The indicator’s moving averages track the uptrend or downtrend in the market. The moving averages track the trend as it progresses and cross each other in a sequential order. The distancing of the price from the Rainbow indicates the continuation of the current market trend. Conversely, if the price moves closer to the Rainbow, it suggests that a potential trend reversal is imminent.
The use of the indicator is also quite simple. Traders should look for initiating a buy position as soon as a strong positive move starts. Similarly, they should look for opening a sell position at the very beginning of a strong negative trend. It is important to note that the angle of the moving averages helps to identify the strength of a trend. The steeper curve suggests a stronger trend and vice versa.
Traders can also use the tool in combination with other tools as a trend-following indicator. Traders can enter a buy position when indicators suggest a strong . They can initiate a sell position when indicators indicate a . Technical analysts and experts always suggest to use the indicator in combination with other tools for successful trading.
Plot a1~c4 --> 10 Rainbow Moving Averages.
This is a Level 1 free and open source indicator.
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