✔️ Information reviewed and updated in December 2023 by Eduardo López
If you wonder what are indicators? Well, to begin with, the indicators are calculated with mathematical operations that are not as difficult as they sound. These indicators like the rainbow MACD are represented by lines on the charts., and are very helpful to investors to identify trends and signals within the cryptocurrency market.
There are different types of indicators, since each one has its own functions. In this article we will talk about a very special indicator for traders. Read on to learn more about the Rainbow MACD indicator, it will help you a lot if you are just starting out.
➡✨Definition of the MACD Rainbow Indicator
This indicator is based on a series of exponential moving averages, and is used for short-term investments. The objective of using varieties of moving averages is because they project future price levels through levels that are marked in the past.
These prices are the support and resistance in the markets, be it forex, commodities, stocks or CFDs. The indicator MACD Rainbow allows adding colors to the MACD curve in relation to other indicators and their characteristics. Its value has a lot to do with the variation of the colors, this helps with additional information.
➡✨ What is MACD Rainbow for?
There are many ways to use this indicator, one of them is combining it with other technical analysis tools such as trend-following indicators. Thus, when the trend is strong and the indicator sends a bullish signal, the trader may consider opening a buy position. On the other hand, if the trend is strong and the indicator sends a bearish signal, the trader may consider opening a sell position. Generally, when the trend is weak, traders do not open new positions.
Another way to use this indicator is alone, the angle of the moving averages can indicate the strength of the trend. The steeper the curve, the stronger the trend will be; and the flatter the curve, the weaker the trend is going to be.
One more way to apply this indicator is that During a strong trend traders look for a short duration pullback, and this can be seen by the rainbow indicator. Traders can enter a position in the direction of the general trend and against the retracement.
➡✨ How is it interpreted?
It has three different ways of interpreting:
- Mode 1: It allows to associate to each time phase of a color scale. In this way, the interest of the analysis is limited. Its objective is based on showing the possibilities of the color functions at the programming level.
- Mode 2: This mode displays a variety of colors based on the spread of the Bollinger bands, the static and the RSI. It only uses a color scale, where the tone is intensified in relation to the signal intensity. The strongest violet represents a weakening of the bullish signal, while the red appears when the bearish movement has reached its limit.
- Mode 3: Here the color scale of the first mode is maintained, but depending on the state of overbought and oversold of the security.