The calculation and chart designing method of the Rainbow Oscillator Indicator is
a two period simple moving average. Afterwards, nine extra moving averages are designed,
with each new moving average based on the previous moving average. Thus, a total
of ten moving averages are created and in a chart, the plot appears like a rainbow.
r1:= Mov (C,2,S);
r2:= Mov (r1,2,S);
r3:= Mov (r2,2,S);
r4:= Mov (r3,2,S);
r5:= Mov (r4,2,S);
r6:= Mov (r5,2,S);
r7:= Mov (r6,2,S);
r8:= Mov (r7,2,S);
r9:= Mov (r8,2,S);
r10:= Mov (r9,2,S);
The Rainbow Oscillator indicator is based on the above calculations and it defines
the highest high and the lowest low of the moving averages. Ergo, an oscillator
and bandwidth lines are created based on those calculations.
The Rainbow Oscillator indicator is used, as most of the financial indicators, to
predict with a certain rate of accuracy the trends of the market. When a market
is rising and the trend is to go up, the most abrupt line is as the top of the Rainbow
and the smoothed line is at the bottom of the Rainbow. Contrarily, when the market
is declining and the trend is to go down, the Rainbow is reversed: the least smoothed
line is as the bottom and the smoothest line as at the top of the Rainbow.
As market prices go up and down, the oscillator appears as a direction of the trend,
but also as the safety of the market and the depth of that trend. As the rainbow
grows in width, the current trend gives signs of continuity, and if the value of
the oscillator goes beyond 80, the market becomes more and more unstable, being
prone to a sudden reversal. When prices move towards the rainbow and the oscillator
becomes more and more flat, the market tends to remain more stable and the bandwidth
decreases. Still, if the oscillator value goes below 20, the market is again, prone
to sudden reversals. The safest bandwidth value where the market is stable is between
20 and 80, in the Rainbow Oscillator indicator value. The depth a certain price
has on a chart and into the rainbow can be used to judge the strength of the move.
The Rainbow Charts indicator and the Rainbow Oscillator indicator are basically
the same indicator, with the only difference being in the graphs they plot. They
both show the same market orientation to trends, but the Rainbow Oscillator is easier
to read, given its bandwidth on the chart.
Since people have arrived to the conclusion that markets are not random, they have
continuously tried to determine a specific and secure way to predict the movements
the markets are the most predisposed to make. Therefore, traders have developed
financial indicators to help them forecast the market trends in logical and exact
ways. Mathematics has always helped in the definition of said indicators, and market
investing has proved itself to be a science that day by day becomes more exact.
Mel Widner introduced a colorful technique for plotting an indicator to signal trend
changes. The indicator is derived from a consensus of trends that has the appearance
if a rainbow, when is plotted in color. The Rainbow Charts indicator is used, together
with the Rainbow Oscillator, for buying and selling signals, as well as determining
overbought and oversold positions.In conclusion, everyone can invest successfully
in the market as long as they have the little programs that help create the easy
–to-read and self sufficient financial indicator charts.