Modern Internet traders are very lucky. Unlike their “old” colleagues, who made transactions over the phone and analyzed the market by calculating complex mathematical formulas, today’s stock exchange specialists have a huge arsenal of ready-made tools.
We are talking about indicators that appear on your workspace literally in one click and are capable of predicting the future price direction of the selected asset with amazing accuracy.
However, there is another side to the coin. Due to the wide range of available tools, many traders make the mistake of placing 5 or more advisors on the chart. As a result, there is confusion in the signals and it all ends in making the wrong decision.
In this article we will look at the Rainbow system, which is based on only one indicator – Moving Average (MA). At the same time, it is capable of giving extremely clear signals for buying a digital option and is suitable for use on any time frame, which is important for this market.
Setting up a workspace for trading using the Rainbow strategy
It is worth noting that MA is one of the oldest instruments in financial markets. During its existence, this indicator has worked on all types of exchanges, from stock exchanges, as well as commodities and ending with cryptocurrency.
The calculation of this tool is very simple. In our case, a simple moving average will be used, which means that each new point of the line being constructed is the arithmetic average of closing prices for a certain period.
Based on the above formula, the conclusion suggests itself that the curved indicator line that appears on the chart quickly reacts to price changes and practically follows the movement of the main trend. It is not surprising that the tool is often used instead of a trend line.
But there is one more nuance: the speed of the indicator’s reaction to price changes depends on its period. The smaller it is, the faster the line reacts.
It is this principle that formed the basis of the Rainbow strategy.
To implement it, we will need to install three MAs on the chart with periods of 5 (lilac), 10 (blue) and 15 (yellow).
Based on the logic of the tool’s operation, it can be stated that during a stable trend, all three lines will move in the same direction, parallel to each other.
However, if a reversal is planned in the market and the trend begins to change, then the moving average with the shortest period, in our case 5, will be the first to react to what is happening. The strategy is based on this fact.
How to trade using the Rainbow system
Based on the above, the intersection of the junior line with a period of 15 MA may indicate the beginning of a change in the main trend. At the same time, crossing the senior line of the moving average with a period of 10 is an excellent signal to buy an option.
CALL contract is purchased when both lines have crossed MA 15 from bottom to top.
PUT contract is done in the case when both lines have crossed MA 15 from top to bottom.
Expiration depends on the timeframe you choose. But it should not be less than the time it took to construct three bars.
Despite its simplicity, the Rainbow strategy is capable of bringing stable profits on binary options. However, it is necessary to take into account that on lower timeframes the likelihood of a false signal appearing will be higher.
