Rainbow Exponential Moving Average Strategy
Strategy known as Rainbow Exponential Moving Average is a binary options trading strategy that has become quite popular among investors as it was first “developed” and introduced a few years ago.
Although this strategy is based on indicators it is not intended to produce bullish or bearish signals therefore it acts as dynamic support and resistance during a trending market.
With that said, it is important to note that this trading strategy requires the market to be in a trend. In trending markets it is not advisable to make use of this EMA strategy.
I believe this strategy can be used successfully, if used in the right way, when used incorrectly it can lead to huge disappointment. So how are we going to use it the right way?
Brief Explanation of Moving Average
Moving average is an important indicator of the Trend Trackers category. What does it measure? The average price, volume or even value of another indicator in a given period. Your graphic representation it is usually done through a line, which moves with each new data received for calculation. Variations include: Simple and cumulative or weighted forms.
Sound complicated? Well it doesn't have to be. Sometimes it's better not to think or even try to understand exactly how it works. The important thing is that you know how to use it. And since you only learn using it in your operations, you should get a better understanding.
Definition of Exponential Moving Average
The exponential moving average, also known as the EMA, shares similar characteristics with the simple moving average (SMA), except that more 'weight' is given to the latest price changes.
For this reason, the exponential moving average is also known as the exponentially weighted moving average. This allows this type of moving average to react to recent price changes much faster than a simple moving average.
How to add the EMA rainbow
The EMA Rainbow Consists of:
- Exponential Moving Average of 6 Periods
- Exponential Moving Average of 14 Periods
- Exponential Moving Average of 26 Periods
It is important that each EMA has a different color, thus becoming the rainbow EMA. You can put any color you like, this is your personal preference, as long as you easily identify it in your graphics.
Applying the strategy in binary options trading, right after adding all three exponential moving averages on your chart it should look like the following example below. To explain how this strategy is applied to binary options, we will use the Figure below as an example:
- 26-Period EMA
- 14-Period EMA
- 6-Period EMA
As you can see in the case of a downtrend, (Note that there is crossover of the averages) you will see that 26 EMA (top) followed by 14 EMA (middle) and lastly the EMA 6 (bottom).
The opposite is true when looking at an uptrend. It is critical that the EMAs are aligned on these orders in the direction of the trend. The 14-period EMA will always be in the middle, acting as our trigger line.
So, wait for the price to touch our trigger line (14-Period EMA) before putting a trade in place.
The more the lines are in their correct orders, we can expect a good signal for trading.
This will occur if we have a strong trending market in either direction, so it is an ideal time to use this strategy. The rainbow EMA strategy can be used in any period (M1, M5, M15, M30, H1).
Completion of the Moving Averages Strategy in Binary Shares
This strategy is undoubtedly one of the easiest and most basic, but it can still be very effective under the right market conditions.
Once again it is important to point out that there is no guarantee that the price can bounce off our trigger line at any given time. Despite not acting as dynamic support or resistance, can easily be violated and cause a change in trend. Always use confluence and be aware of these market reversals points.
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