Even inexperienced traders can easily identify trade. Highs and lows may be easier to grasp even for novice traders. But sometimes they can be too complicated and too demanding for the brain to grasp. Take trend lines for example. They can be too subjective because various traders can have different drawings on them. One thing that can make trading a whole lot easier is indicators. A good trend indicator that you can use is the Rainbow Madness Strategy. This can actually give you some attractive charts.
HOW TO USE RAINBOW MADNESS STRATEGY?
The name itself comes from the image formed in the chart which a rainbow like formation. The idea behind this strategy is to know the trend using numerous moving averages that needs to be arranged in a specific order. Once you have identified the trend you need to two other moving averages or a cross. This may be madness but you have to trade.
The rainbow is made up of Green, Purple, and Blue moving averages. When Moving Averages are being arranged in a specific way (Blue is in top, Purple is in the center, and Green is below) that is when price is in an upward trend. As for downward trend, it is the exact opposite. Once a trend is in its place in accordance with the Rainbow, you take the 1st EMA 12 and EMA 10 cross in the trends direction. When you are in an upward trend you will have to trade when there is a bullish market. This means that EMA 10 crosses on top of EMA 12. If you are in a downward trend, you will have to trade on bearish cross. This means that EMA 10 crosses just below EMA 12.
When the conditions are all met, a Call or Put can hence be placed. You have to do the selection of expiry time and time frame. However, you may use higher expiry time that your chart’s times frame. Therefore, if you are trading using a five minute chart you could set the expiry time to fifteen minutes. You can simply download and install Rainbow Madness archive that has three indicators. When you have installed it you have to paste all of these in your desired folder. You also need to apply all three to a certain chart. Upon installation, you will also see Rainbow moving averages. These indicators are for MT4 platform. Thereby, if you do not use this then you can use them manually.
WHY IS THIS STRATEGY BAD?
Many traders who are using Moving Averages have always complained about its constant lags. As a matter of fact, these complaints are legit because even when you use it they actually lag. The lagging stops once the moving averages are arranged. And when these averages are arranges prices will be gone. The sadder thing here is that you will have no one to complain to when these averages lag. All you can do is wait. However, no system is actually perfect and Rainbow Madness is no exemption of the imperfection rule. The obvious imperfection of this strategy is that it can make you miss trades in markets that are fast moving. It can even give you very late entries.
WHY IS THIS STRATEGY GOOD?
Yes it lags thereby it is sluggish but it can easily compensate with this negative factor. The Rainbow Madness strategy can keep us away from ranging markets. When you realize that the moving averages are all mixed up you will know that it is not the right time to execute your trade. Thereby it is ideal to back away. Trends are not individual moves. This means that the Rainbow can still have time to properly arrange itself. Particularly when you trade different assets, you will then learn how to pick the best signals only.
The Rainbow Madness is purely trend following. This kind of strategy comes with high success rates. It may not be your ideal trading tool but for some traders, most especially novices, they will find it ideal for recognizing trends. There may be other versions of this strategy but this one can be easily understood and there are less confusion added to it.