This is the trading system I invented called the Rainbow, because it uses 3 Exponential moving averages (EMAs) and is based upon the gap between them. The gap increases and decreases over time and at a certain point it reaches a peak before the 3 EMAs converge back together again. When this happens, the price is almost guaranteed to reverse. Here’s what you need…
4 EMA (light blue)
12 EMA (yellow)
26 EMA (red)
Rainbow MACD indicator
5,3,3 Stochastic oscillator
Use any timeframe, 5M and higher is recommended.
BUY conditions:
Enter buy when the 3 EMAs have diverged at a peak from each other and are starting to converge with the 26 EMA (red) above the other EMAs. This can be determined when the Rainbow MACD changes colour from red to blue and is at least -0.0002 in value. The 5,3,3 stochastic is at oversold.
SELL conditions:
Enter sell when the 3 EMAs have diverged to a peak and are starting to converge, with the 26 EMA below the other EMAs. Make sure the Rainbow MACD changes colour from green to blue and is at leas 0.0002 in value. The 5,3,3 stochastic is at overbought.
Take Profit at price touching the 26 EMA or when the stochastic oscillator swings all the way to the opposite end.
Careful when trading during a steep trend, make sure the 4 EMA is higher than 12 EMA which should be higher than 26 EMA on an uptrend, the opposite applies on a downtrend.
You could add a 50 EMA for more pips. Pictures below illustrate this.
rainbow.zip (8.25 KB)