Recommended for Newbies

Exponential Moving Average Rainbow Strategy Review


What Is The Exponential Moving Average Rainbow Strategy?

The Exponential Moving Average Rainbow strategy is a binary options trading strategy that uses the 6, 14 and 26-period exponential moving averages (EMA) to determine points at which the trade can purchase a call option (buy) or a put option (sell). The concept of this system is to use the signal provided by the EMA cross on the currency chart, and apply the signal to the same currency in the binary options market. This is a trend following strategy. In terms of this strategy, an uptrend is identified when 6 EMA is above 14 EMA and both are above the 26 EMA. Once this condition is met, the trader must wait for price to retrace down towards the 14 EMA (so the one in the middle) and touch it. Once this happens, a Call option can be used, according to the system. For a Put, the 6 EMA must be below 14 EMA and both below 26 EMA. Then we must wait for a retracement upwards, toward 14 EMA. Once price touches 14 EMA, a Put option can be placed according to the system. It is a trading strategy that is only used in trending markets. It will not work if the market is range-bound. Here’s a picture to easily visualize a Call setup:

 Exponential Moving Average Rainbow Strategy



Why does the Rainbow Strategy Suck? My Opinion

Personally, I do not take extremely short-term positions in the forex or binary options market because I find them to be too speculative. Speculation is a tool that has never suited retail traders well, and this strategy is no different. For this strategy, there are times when the retracing price goes beyond the expected bounce point at the 14EMA. Inexperienced traders may not be able to handle this. The Rainbow Strategy sucks because it has a potential for whipsaws and false signals. However, these potential losing trades can be weeded out by applying other technical indicators like trendlines, moving averages and Fibonacci’s.


Why this Rainbow Strategy May Not Suck After All

This strategy is adaptable to other time frames aside from the 5-minute time frame, so a longer time frame can be used to make the trades more manageable and less speculative. A signal on a long term chart confirmed by a signal on a short term chart has more reliability than either signal taken alone. Traders sometimes get confused as to what position to take in the binary options market. We have found one area where charts and indicators for binary options technical analysis are lacking, this indicator helps fill that gap.


traders can draw some succor from the fact that currencies form the bulk of the binary options traded assets. Because of this analysis analysis of currencies in the forex market can be used to generate trading signals in the binary options market. Breakouts and pullbacks are an integral part of the markets. When to re-enter after the price of an asset has pulled back from a period of trend movement is a usual dilemma for traders. By employing the Exponential Moving Average Rainbow strategy, traders can get a rough idea of when to re-enter in the direction of the previous trend, and take the corresponding position in the binary options market.



How To Use The Rainbow Strategy

In my opinion, the strategy solves the problem of when to buy after a bearish pullback, or when to sell after a bounce retracement. It is also easy to identify and simple to use, since it makes use of only one indicator. It can also be used on several time frames to generate binary options signals, depending on the expiry time the trader has in mind. However it has its draw backs. Sometimes, the price retracement exceeds the 14EMA point, producing some confusion in traders as to when to pull the trigger. Another point is that when it is used on the short-term time charts, the signal’s reliability could be endangered by the choppiness of the price action on these charts.




The Last Words On The Rainbow Strategy

Like other systems in the market, the trader has to make some concerted effort in studying how this strategy works using a demo platform along with simultaneous order placement on the demo platforms of binary options brokers. When this is done, then traders can look onto the Exponential Moving Average rainbow system as another trading tool in the arsenal. I think this strategy is better used as a tool. It does have some drawbacks that make using additional tools a necessity. For this reason incorporating it into or with another tool/strategy is a must.