Rainbow Moving Average Indicator

The MT4 Rainbow MA technical indicator, based on moving averages, aims to follow the trend. The MA Rainbow indicator in MT5 also identifies uptrends and downtrends, assisting traders in decision-making based on these results. This article will explain the Rainbow MA indicator, available on MetaTrader 4, MetaTrader 5, and TradingView, and show how to use it properly and interpret its results.

What is the rainbow moving average indicator?

Also known as the “Simple Moving Averages Rainbow indicator” or the “Averages Rainbow Indicator”, the Rainbow MA indicator serves in technical analysis to identify the current trend. It enables traders using the MT4 Rainbow MA indicator to detect an asset’s current price trend or predict future changes. Moreover, the indicator presents several simple moving averages with varying time period lengths. Each moving average line features a different color, resulting in the name “MA Rainbow” for the indicator.

How does the MA rainbow indicator work?

The MA rainbow indicator for MT5 contains basically 10 moving averages with different periods. The periods are fully customizable depending on the user’s preferences. However, a 25-period gap is advised so that the MA values could increase by 25 each time until reaching 250 days. Furthermore, there are 255 trading days in a year but we’ll take into consideration a variance of 5 days.

The goal is to smooth the moving average line as much as possible to see the asset’s price clearly. In other words, a 25-day moving average shows a lot of fluctuations which is useful for speculation. However, a 150-day or 250-days moving averages are smoother and therefore, more adequate for mid and long-term investors.

Furthermore, as this indicator is fully customizable, there are a few people that prefer to display only 5 moving averages which are 10/20/50/100/200. Also, some other people prefer to scale up and replace the SMA with EMA or WMA, or even HMA.

What is the Rainbow Strategy moving averages?

The Rainbow MA strategy consists of combining a certain number of moving averages with different periods. The moving averages could be simple, exponential, weighted, hull, or adaptive.

This strategy provides traders with more techniques used to interpret the results. Therefore, the Rainbow MA strategy allows users to trade based on crossovers, on the position of the MA lines compared to the candlesticks, or based on the support and resistance technique.

How do you trade with the Averages indicator?

It is the most simple and easy-to-use one. This strategy is based on observing the chart with the MA rainbow applied to it. The decision rules are as follows:

Strategy 1: Price & Moving Averages position.

If the candlesticks are above the moving average lines, then the trend is bullish. Therefore, the trader is advised to buy the asset and go long on it.

However, if the price is below the moving average lines, or crossing most of them, then the trend is bearish. Therefore, the trader should sell the asset or go short on it.

Strategy 2: Moving Averages Crossovers.

This strategy of moving averages ranks among the most famous. It involves monitoring SMA1 and either SMA10 or SMA5, based on user preference. If the SMA1 (Short-term) crosses and rises above the SMA10 or SMA5 (long-term), we consider it a buy signal, also known as the “Golden Cross”. Conversely, if the SMA1 (Short-term) crosses and falls below the SMA10 or SMA5 (long-term), we interpret it as a sell signal, known as the “Death Cross”.

Strategy 3: Usage as Support & Resistance.

You can also use the numerous moving averages in the Rainbow MA indicator as support and resistance levels. Thus, traders identify MAs below the price as support levels and those above the price as resistance levels.

Moreover, shorter moving averages generate weaker resistance and support levels. Therefore, if the price rises above the MA functioning as resistance, the bulls take control and the price will likely continue to increase. On the other hand, if the price falls below the MA acting as support, we can expect a probable downtrend.

Download the MA rainbow indicator for MT4

The MA rainbow indicator is available for the MT4 Platform (MetaTrader4). It is a combination of moving averages with different lengths. The following example displays the USA vs. Japanese Yen over a 1-day timeframe with the MA rainbow indicator applied to it. In this example, we are going to use a mix of the strategies mentioned before to detect the trend and predict further price movements.

Example

We have detected 4 important points using the Rainbow MA indicator. First of all, the red line stands for the SMA 1 which is a 25-day moving average. We can observe that the candlesticks went above the SMA1 which indicates that the price is rising.

As for the second point, we could see that the SMA 10 which stands for the 250-day moving average could be used as the resistance level before the 16th of November. The price broke through the resistance level and went above it indicating a continuation of the uptrend which was quite towering.

However, this uptrend was only confirmed later when the SMA1 crossed the SMA10 forming a golden cross. By the end of the year, the price went below the SMA1 which indicated the start of a downtrend.

This example explains the importance of using simultaneously the 3 strategies mentioned above for a better trading experience and more reliable observations.

Download the MA rainbow indicator for MT5

The Rainbow MA indicator is also available for the MT5 platform. It offers the exact same features as the older version. In other words, the same customizability in terms of colors, periods, and types of MA, …

The following example displays the Euro vs USA chart over a 4-hour timeframe. With the Rainbow MA indicator applied to MT5, we could detect the following:

At first, the candlesticks are above the SMA1 which is a 25-day MA. This indicates that the price is increasing and the uptrend is continuing.
A golden cross was also detected when the SMA1 (in red) crossed above the SMA10 (in white) which confirms the uptrend.
The SMA1 is the shortest one and therefore, in this case, it couldn’t be taken as a support level as it’s broken through many times. Thus, the SMA2 (in orange) which stands for 50-day MA will be considered as a support level.

Download the MA rainbow indicator for Tradingview

The Rainbow MA indicator is also available for tradingview, of course with the same features as the versions available for the MetaTrader Platform.

In the following example, we applied the Rainbow MA indicator to the Apple stock price traded on the NASDAQ using a Tradingview chart. We decided to display only five moving averages with lengths of 10, 20, 50, 100, and 200, observing the following:

On the 14th of June, the price rose above the SMA1 (in red), which has a 10-day length. A golden cross appeared later to confirm the trend. Unfortunately, this cross appeared near the end of the uptrend, making reliance on MA crosses unprofitable since we use them to confirm trends rather than detect them.
By the end of August, the price fell below the SMA1 and a Death cross followed shortly. This indicated the end of the uptrend and the start of a downtrend.

Conclusion

The Rainbow MA indicator is a combination of moving averages with different lengths used to detect the trend and predict future movements.
The indicator offers full customization; thus, users can adapt the length of each moving average according to their preferences. Typically, some users favor using 10 successive MAs, while others opt for only 5 MAs.
There are different trading strategies used to interpret the rainbow MA results. However, the main 3 ones are trading based on: the price & MA position, using the MA as support and resistance and trading using MA’s crossovers.

August 16, 2023