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Rainbow Strategy for Binary Options

Many binary options traders know that an asset price always comes back to moving average from time to time, even during a strong trend. That is especially important when traders want to take advantage of sustainable market moves, maximising profits. However, simple moving averages do not take into account the spikes and whipsaws of the price. Even a single exponential moving average might not give a precise entry-level when it’s time to start buying call or put options. Experienced traders use a set of EMA indicators with different periods, getting certain price ranges to find an effective trading signal. This trading approach is called EMA Rainbow Strategy.

What is Rainbow Strategy?


This is a by-trend binary options system based on one single indicator - EMA Rainbow. Binary options EMA technical tool allows traders to calculate the potential depth of a retracement, and identify a moment when the underlying asset finishes correction and continues moving in the same direction as before. The EMA Rainbow indicator has a set of Exponential Moving Averages with different periods highlighted by several colours.

How to use Rainbow Strategy?


Here is a standard view of the Rainbow Strategy:

Rainbow Strategy for Binary Options

Once an asset price bounces from the top or bottom of the market, the indicator reflects continuation and reversal ranges to conclude further trend’s direction. For example, if a price bounced down after reaching a peak, or retraced back up after finding a bottom, but remained in the yellow band, then traders should count on the uptrend continuation. But if the market retraced to the blue zone, then a deeper correction might take place. The green territory could signal a trend reversal, which is confirmed when the EMA Rainbow indicator switches the order of layers.

How to setup the chart


In the list of technical indicators, a trader should choose EMA Rainbow, and add it to the price chart with default settings. Some of the indicators have modifications of different EMA periods, one of them is called Rainbow 200.

The Rainbow EMA strategy uses three exponential moving average EMA:
6-period moving average (EMA 6)
14-period moving average (EMA 14)
26-period moving average (EMA 26)

Rainbow Strategy for Binary Options


If you like this strategy, you might also be interested in this Binary Snipers

A simplified view of Rainbow Indicator


As long as the number of EMA is too large, some analysts use a simplified view of the indicator - Trimple EMA. The main idea is to show just borders of three zones and highlight related colours.

In that case, parameters should be set as follows:
  • First EMA period is set to 6 bars and the colour is yellow;
  • Second EMA period is 14 bars with blue colour;
  • Third EMA is modified to 26 bars with green colour.

The Rainbow Strategy chart will look like this:

Rainbow Strategy for Binary Options

How does the Rainbow Strategy work?


The system was designed to trade on any asset class including currency pair, commodities, stock indices and cryptos. The best rainbow strategy setup is the 5-minute timeframe, while the 15-minute expiration period should be chosen to buy call or put options.

Conditions to buy CALL options:
  • Yellow curve is on top and the green one is on the bottom;
  • The price moves down and crosses the blue EMA but not the green one;
  • The same candlestick’s close rate is above the blue line;
  • Start buying 15-minute call options;
  • Stop the trading cycle when the price closes below the blue or green line.

An example below shows a call-option trading cycle on EUR/USD 5-minute chart with more than 90% 15-minute deals in the money.

Rainbow Strategy for Binary Options

Conditions to buy PUT options:
  • Yellow EMA is on bottom and the green one is on top;
  • The price moves up and crosses the blue EMA from below but not the green one;
  • The same candlestick’s close rate is below the blue line;
  • Start buying 15-minute put options;
  • Stop the trading cycle when the price closes above the blue or green line.

Here is an opposite example with the same EMA Strategy chart setup for AUD/USD:

Rainbow Strategy for Binary Options

Conclusions


Although the Rainbow Strategy is quite simple, and it uses only one technical analysis tool, it has limitations as it works only in strong trend conditions. Thus, it’s required to make an additional analysis on larger timeframes to maximise profits. At the same time, the number of trading signals to start buying call or put options is quite small, therefore, the trading activity happens rarely. Another disadvantage is that traders should buy 15-minute options when making the analysis on 5-minute charts, which reduces the number of profitable deals for the same period. However, that gives an advantage in terms of better efficiency and a larger number of profitable positions. The system is multi-purpose in terms of different underlying assets to work with, and it allows taking advantage of a wide variety of charts.


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