Moving
Average Rainbows – Part 2
Moving Average Rainbows uncover complex and startling
trend-time relationships. When price undergoes a sudden shift in direction, the ribbons
twist and mark clear signposts for the volatility that follows. Each of the averages
requires a different time period to absorb price change. This emits a broad range of
rainbow patterns that have obvious predictive power.
As the new trend evolves, MARs slowly invert themselves to
accommodate the changing conditions. Time your positions to these visual
inter-relationships. Execute swing trades when criss-cross MARs predict pivoting price
movement. Once inversion completes, replace this strategy with a trend-following system
that takes advantage of the new, convergent environment.
Use MARs to cross-verify signals ringing in other trading
systems. It's no coincidence when complex math relationships point to an entry price where
a major moving average stands. The rainbows ease the trader’s work through their
visual simplicity and the "spectrum" analysis they provide.
Don't ignore popular averages, such as the 20, 50 and 200
day SMAs when creating MARs. They provide an easy framework for quick digestion of a large
number of stock charts. Even if these old war-horses aren't part of your system yet, watch
them to measure the crowd you're trading against. Focus on the common belief that
short-term trends won’t violate the 20-day MA, while intermediate and long-term
impulses find support at the 50 and 200 day MAs.
The practice of technical analysis often lacks simplicity.
One unfortunate charting bias seeks ever more complicated sets of math in order to predict
price. On the contrary, many traders now earn their living using little more than simple
inputs of price and volume, packaged with moving averages. These kings of the
trader’s toolbox provide an essential link between time, price and trend. And these
natural building blocks tie together easily into powerful visual trading systems.
