Rainbow Madness – Looking for the Leprechaun’s Pot of Gold

Full Review of the Rainbow Madness Strategy for Binary Options

I’ve been thinking a lot lately about trends and how a relatively inexperienced trader can easily identify them. Higher Highs, Higher Lows and all that stuff is sometimes too complicated for a newbie. Trend lines…are too subjective because different traders can draw them differently. But then I stumbled upon the Rainbow Madness strategy and I figured: if it’s not a great strategy, at least we will have a good trend indicator to use for other strategies…or at least we will have some good looking charts. Ok, let’s cut to the chase and see how to use it:

How to use The Rainbow Madness

If you take a look at my chart below, you will understand where the name comes from and probably how to use the strategy. The main idea behind it is to identify the trend with the use of a lot of moving averages that have to be arranged in a particular order. When the trend is identified, we wait for a cross …of another two moving averages (yes I know, it’s madness) and finally, we trade. I am not going to tell you all the moving averages periods but I’m gonna do something even better: I’m gonna give you some indicators and those will plot all the rainbow moving averages on your chart. You still have to apply the other two manually: 10 periods Exponential Moving Average and 12 periods Exponential Moving Average. Here is how the chart will look like:

The Blue, Purple and Green Moving Averages constitute the Rainbow and we consider price is in an uptrend when the MAs are arranged in a certain way: Blue above, Purple in the middle and Green at the bottom. The opposite applies for a downtrend.  Ok, when a trend is in place according to the Rainbow, we take the first EMA 10 and EMA 12 cross in the direction of the trend. I think I am going to explain that just to make sure everybody gets it right: if we are in an uptrend we will only trade when a bullish cross occurs, meaning that EMA 10 crosses above EMA 12. If we are in a down trend, we only trade on a bearish cross, meaning that EMA 10 crosses below EMA 12. Here’s the picture explaining what I’ve just said:

Once all the conditions are met, a Put or Call can be placed accordingly. The choice of time frame and expiry time must be made by you but I would use a higher expiry time than the chart time frame. So if I trade using a 5 minute chart, I would set the expiry for 15 minutes.

Here is a summary of the entry rules:

Call Entry:

1. Blue MAs are at the top, Purple ones are in the middle and the Green ones are at the bottom
2. EMA 10 (Red) crosses above EMA 12 (Yellow)

Put Entry:

1. Blue MAs are at the bottom, Purple ones are in the middle and the Green ones are at the top
2. EMA 10 (Red) crosses below EMA 12 (Yellow)

Hint: obviously the Purple MAs are going to be in the middle whenever there’s a trend so don’t worry about them.

You can download Rainbow Madness archive containing the three indicators and once you install those (you need to paste all three in your “indicators” folder) and apply them to a chart, the Rainbow moving averages will appear (yea, technology makes rainbows appear nowadays). The indicators are for the Meta Trader 4 platform so if you don’t use that, I will be happy to tell you the MA settings for you to apply them manually.  Just ask me on our Forum. However, no matter the platform, EMA 10 and 12 will be applied manually.

To make it easier, I have also attached a template (.tpl). That must go into C:\Program Files\YOUR MT4 BROKER NAME\templates. Then you have to re-open your MT4, right click on a chart, go to “Template” and select “Rainbow”. If you don’t use the template you will have to do some tweaking to the Rainbow colors so they will look like the ones on my chart. I recommend the use of the template.

Why does the Rainbow Madness Suck?

Traders have always complained about the lagging nature of the Moving Average and now I’m gonna let my nagging self do the talking: they laaaag…until all the MAs are arranged, price is gone. It’s not like I can call Apple and say “Hey, don’t release your Earnings Report just yet, my MAs are not arranged and your charts will move too fast…Wait a little, wait, wait…Ok, now you can release it.” Well, no system is perfect and this one will make us miss some trades in fast moving markets or will even give late entries.

Why Rainbow Madness doesn’t Suck?

Although it can be a bit sluggish sometimes, the Rainbow keeps us out of ranging markets: when the MAs are mixed up, you know it’s no time to trade and it’s best to stay away. Trends are not single moves and this means the Rainbow will have time to arrange itself properly and especially if we trade several assets, we will learn to pick only the best signals.

Wrapping it up: Newbies Approved

This is a pure trend following strategy and it is known this type of strategy has a high success rate. It is not exactly what I would trade, but some traders (especially beginners) will find it great for trend recognition. The original strategy can be found at http://forex-strategies-revealed.com/complex/rainbow-madness and if you follow the link, you will see there’s also a second, more complex version of the strategy but I consider it would just overcomplicate things and confusion would set in…if it didn’t already (hope not). So thanks to the guys who coded the indicators and good luck if you need it.

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