The Rainbow Averages strategy is definitely not suitable for beginner traders and is definitely not an independent trading system. It is designed to search for possible points of the beginning of trend movements or corrections. But it does not imply an accurate interpretation of the signals. It is rather an auxiliary tool that can be useful for building some kind of individual tactics. With direct guidance on opening deals, which are attached to the manual for the strategy, the number of false signals is about 50%. But they can be filtered out by filtering out the signals of the beginning of corrections or by working according to the swing trading system at intervals from H4.
Rainbow Averages – trend and correction trading
At the heart of Rainbow Averages is a fan of moving averages, formed by the so-called zones of uncertainty. Filters have been added to the strategy, which partially help to confirm the signal.
- Currency pairs – any.
- Timeframe – from H1-H4.
- Indicators – Averages Rainbow, Step One, Buzzer.
You can download the strategy template with indicators for MT4 here. The template itself is added to the Templates folder, the indicators are added to the Indicators folder, then the platform is restarted.
- Long position opens when an up arrow appears at the moment the color of the zone changes from pink to green. In this case, the price should be above the zone (most of the candle is closed above the zone), Buzzer is blue.
- Short position opens when a down arrow appears at the moment the color of the zone changes from green to red. In this case, the price should be below the zone (most of the candle is closed under the zone), Buzzer is red.
Closing the deal is at your own discretion. Several options: by trailing, insuring the deal with an order 30-40 points long for the H4 interval; changing the color of the zones and the appearance of an opposite arrow, the price breaking the zone of its color in the opposite direction (for example, for a short position: the zone remains pink, but the price breaks it from the bottom up).
The developers of Rainbow Averages warn in advance that the strategy does not work in a flat. But this is precisely the difficulty – by the time a clear trend is formed, the signals turn out to be late. Therefore, it makes sense to be guided by any signals, reinsuring yourself with patterns, trailing and closing deals manually in case of a clear forecast error.
As an example, the chart of the USD/CAD pair with the H4 interval is taken. The longer the interval, the shorter the length of the movement will be suitable for the payback time. If you set the interval to M15 and catch a move 3 candles long, it will correspond to a return of about 10 pips excluding spread. 3 candles on the H4 interval is more than 50 points.
- 1 – Strong signal. There is a change in the color of the zone from green to pink, there is an arrow, the difference between the appearance of the arrow and the price dropping below the pink zone is small. We close the deal when the price returns to the zone again.
- 2 – Weak signal. The up arrow appeared too early – on the pink zone. More than 4 candles have passed from the moment the arrow appeared until the green zone appeared and the price moved to the area above it. This means the risk of late entry. In such cases, it is better not to open transactions.
- 3 – Strong signal. There is a coincidence of all conditions with a small gap in the number of candles.
- 4 – Strong but complex signal. The up arrow appeared too soon. A full signal is formed only when the price goes up more than 80 points. If we ignore the subsequent correction, then the profit would be more than 150 points.
- 5 – Accurate, but partially false signal. All conditions are met here, but the downward movement turns out to be a local correction of the uptrend.
- 6 – Strong but complex signal. Here the situation is similar to signal 4. There is an upward signal formation, but first you need to wait for the correction.
- 7. Strong signal. There is an end to a long uptrend and a move down.
Conclusion. In addition to the main signals, the Rainbow Averages strategy needs to take into account additional factors: monitor the presence of the main trend in order not to open deals on short corrections, control fundamental factors, etc. The system is built on the search for signals of a strong inertial movement, but whether it turns out to be a trend one needs to be determined using other tools. The frequency of appearance of signals is relatively high, therefore, on the H4 interval, the search for even small movements, 2-3 candles, pays off.