Rainbow Trail Forex Trading Strategy

0
987
Rainbow Trail Forex Trading Strategy

Simple is sometimes better. The same is true with trading. Although complex trading strategies and technical indicators have their place and can be used effectively, simple indicators could also be very effective.

Moving averages are one of the most basic types of technical indicators, yet it is also one of the most widely used. Most traders have a moving average line plotted on their trading charts. This is because despite its simplicity moving averages are very effective trading tools.

Moving averages are often used to identify trending market conditions. It is either used to identify the current trend direction or spot potential trend reversals.

Traders use a variety of methods on how to identify trend direction using moving averages. First, traders simply look at the slope of a moving average line to identify the current market trend. Another method is by identifying where the general location of price action is in relation to the moving average line. Lastly, traders also identify trend direction based on how two or more moving average lines are stacked.

Traders also identify potential trend reversals based on crossovers. Either they are looking for price action to cross over a moving average line or they would wait for a moving average line to cross over a slower moving average line.

Another way traders use moving average lines is as a dynamic area of support or resistance. In a trending market condition, if price is already overbought or oversold, traders would often either close their current trades to cash in on profits or wait for price to be more advantageous to them. This often causes price to retrace towards the mean. Looking at a chart, retracements would often cause price to move towards the moving average line. As soon as price is deemed fair, many traders would then jump in on the trade hoping for a trend continuation. This causes price to move in the same direction as the previous trend.

Rainbow Trail Forex Trading Strategy is a trend continuation strategy which uses a technical indicator based on a set of moving averages to identify potential trend continuation plays after a retracement towards the average price.

Rainbow MMA 09

Rainbow MAA 09 is a custom technical indicator based on a set of modified moving averages. It plots eight moving average lines with varying moving average period lengths. The faster two lines are color gold, while the slower six lines are color deep sky blue.

This indicator can be used to identify trend direction and trend strength.

Traders can identify trend direction using this indicator based on the location of the gold moving average lines in relation to the deep sky-blue lines. If the gold lines are above the deep sky-blue lines, the market is in an uptrend. If the gold lines are below the deep sky-blue lines, then the market is in a downtrend.

Trend strength can be based on the expansion and contraction of the moving average lines. If the lines are expanding, the trend is strengthening. On the other hand, if the lines are contracting, then the market is either contracting or is about to reverse.

HMA v2

HMA or Hull Moving Average is a moving average technical indicator developed to improve on the standard moving average lines.

Although moving average lines are quite effective indicators, most types of moving averages have the same weakness. Most moving average lines tend to be very lagging. This means that traders might not be able to respond to price action changes quite effectively if they are waiting on a lagging moving average line.

For this reason, traders developed variations of the Simple Moving Average (SMA) in order to decrease lag. Among these are the Exponential Weighted Moving Average (EMA) and the Linear Weighted Moving Average (LWMA).

The Hull Moving Average (HMA) was also developed to attempt to eliminate the lag which plagues most moving average lines. The HMA succeeds in decreasing lag significantly, yet it also maintains a moving average line which is very responsive to price changes.

This version of the HMA plots dots instead of a line. These dots change color to indicate the direction of the trend. A light blue dot indicates a bullish short-term momentum, while a tomato dot indicates a bearish short-term momentum.

Trading Strategy

This trading strategy is a trend following strategy which is based on the concept of using moving average lines as a dynamic area of support or resistance.

First, trend direction is identified based on the Rainbow MMA 09 lines. This is based on how the gold and dark sky-blue lines are stacked. The slope of the lines should also confirm the direction of the trend. On top of this, price action should also confirm trend direction based on the pattern of its swing points.

As soon as the trend is established, we then wait for retracements. Price should retrace towards the area of the Rainbow MMA 09 lines. The retracements should cause the HMA v2 dots to temporarily reverse.

Trades are taken as soon as the HMA v2 dots resume the color of the main trend while aligned with a candle that confirms the direction of the trend.

Indicators:

  • HMA_v2
  • RainbowMMA_09

Preferred Time Frames: 30-minute, 1-hour and 4-hour charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The gold lines of the Rainbow MMA 09 indicator should be above the deep sky-blue lines.
  • The Rainbow MMA 09 lines should slope up.
  • Price action should create higher swing highs and swing lows.
  • Price should temporarily retrace causing the HMA v2 dots to temporarily reverse.
  • Enter a buy order as soon as the HMA v2 dots change to light blue while in confluence with a bullish candle.

Stop Loss

  • Set the stop loss on the support below the entry candle.

Exit

  • Close the trade as soon as the HMA v2 dots change to tomato.

Rainbow Trail Forex Trading Strategy

Rainbow Trail Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The gold lines of the Rainbow MMA 09 indicator should be below the deep sky-blue lines.
  • The Rainbow MMA 09 lines should slope down.
  • Price action should create lower swing highs and swing lows.
  • Price should temporarily retrace causing the HMA v2 dots to temporarily reverse.
  • Enter a sell order as soon as the HMA v2 dots change to tomato while in confluence with a bearish candle.

Stop Loss

  • Set the stop loss on the resistance above the entry candle.

Exit

  • Close the trade as soon as the HMA v2 dots change to light blue.

Rainbow Trail Forex Trading Strategy 3

Rainbow Trail Forex Trading Strategy 4

Conclusion

Trading on retracements towards an area of dynamic support or resistance is one of the more effective ways to trade in a trending market condition.

If used in the right trending market, this strategy could produce constant profits again and again as long as the trend lasts. However, traders should also be careful not to trade this strategy in a choppy market or in a trend that is not fit for the timeframe.

Some trends could be too steep on the shorter timeframes, while other trends could retrace too deep on other timeframes. One way to find out which timeframe to use is to scan through different timeframes and see where price is respecting the Rainbow MMA 09 lines as a dynamic support or resistance. As soon as you find the right trend on the right timeframe, you could start using this trend continuation strategy effectively.

Recommended MT4 Brokers

XM Broker

  • Free $50 To Start Trading Instantly! (Withdraw-able Profit)
  • Deposit Bonus up to $5,000
  • Unlimited Loyalty Program
  • Award Winning Forex Broker
  • Additional Exclusive Bonuses Throughout The Year

XM broker

>> Sign Up for XM Broker Account here <<

FBS Broker

  • Trade 100 Bonus: Free $100 to kickstart your trading journey!
  • 100% Deposit Bonus: Double your deposit up to $10,000 and trade with enhanced capital.
  • Leverage up to 1:3000: Maximizing potential profits with one of the highest leverage options available.
  • ‘Best Customer Service Broker Asia’ Award: Recognized excellence in customer support and service.
  • Seasonal Promotions: Enjoy a variety of exclusive bonuses and promotional offers all year round.

fbs broker

>> Sign Up for FBS Broker Account here <<

Click here below to download:

Save

Save



Get Download Access

Get Smarter About Forex Trading Using Indicators

Join 100,000+ subscribers and get our 5 min daily newsletter on what matters in forex.

We do not sell or share your information with anyone.

LEAVE A REPLY

Please enter your comment!
Please enter your name here