Rainbow Dragon Strategy

I use Moving Averages, which are a basic tool that calculates the average price for a particular time period and draws a line on the chart. 

People usually use 1 or 2 of them to show the longer and shorter trend of the market. 

I use Exponential Moving Averages 500 to 10, apply different colors, which creates a rainbow on the chart.

As price goes up and down, it creates a movement that often looks like a dragon.

You can see that the volatility of the price creates places where the rainbow is tight, and places where the rainbow is expanded.

The tight zones are the important support and resistance areas, where price is stalling, which means that traders all over the world hesitate between buying and selling. 

Those areas usually go sideways for some time, until either the buyers (called Bulls) or sellers (called Bears) win over the others.

Then price usually shoots up or down, and that's when we need to be in the trade, and in the right direction!

On my chart below, point A is where I got the buy signal according to my strategy and indicators. So I bought a few lots at around 1.3923. Then I sold half of them at 1.3993 because it was a monthly pivot at point B. I kept the rest of my lots until it reached the second pivot at point C. 

Then point D was the next signal, to sell this time. That was a good trade with good profit, but it isn't always that clear.

That's why trading is not a science but an art.

Ok, I hope I didn't make you dream about quiting your job yet.

Remember, you need months if not years of practice before you can hope to become profitable consistently, so don't shout back at your boss just yet !!

I provide private tutoring and teaching of the Rainbow Dragon© strategy, if you are interested, contact me now.

A Few Rules... 

Signal

The signal is given by the HG_0001a_MTF indicator, it looks at the timeframe you are trading + the 3 higher timeframes. When all 4 lines turn to blue is the buy signal. When all 4 lines turn to red is the sell signal. However, you should not trade all signals. You should take the one that happens in the opposite direction after a big move, because the odds that price will retrace are higher after a big move. Also we recommend not to enter right away when you get a signal, but wait until it retraces back to the red area of the rainbow. Sometimes it will retrace, sometimes not, that is why I recommend to enter 1 mini-lot when you get the signal, another mini-lot if it retraces a bit, and yet another mini-lot when it touches the 500 EMA.

Size

As mentioned above, you must not trade 1 big lot, but split it in a minimum of 3 mini-lots. For example if your money management rules allow you to trade a maximum size of 0.30 according to your equity, do not open 1 trade with 0.30 size, but open 3 trades with 0.10 size. It is always better to have many mini-lots, instead of 1 big lot, because it allows for more flexibility should you choose to close some of them. It also allows you to have 3 different targets instead of just one, therefore you can let the profit run with more confidence.

Stop-Loss

Stop-Loss is the tricky part. You should place your SL under the swing-low when you buy, and above the swing-high when you sell. However, it can sometimes be quite a big SL depending on the market, but it doesn't matter, it is more like a security in case of unexpected big news. Because even if price starts to go against you, the HG_0001a_MTF indicator will give you a signal in the opposite direction fairly quickly, and therefore you will have to close your open trades and go the other way. So actually even if you have a big stop-loss, it will most likely never be hit, because you should get an opposite signal before it happens.

Hedging

Another way to trade this strategy is to trade without stop-loss, but with hedging. This way you will not get the many small losses that happen in the sideways market. Hedging can be tricky and I recommend you use this only if you know how to hedge, but basically you should always have more size on the side where the rainbow dragon is heading. Sometimes it can happen that when the big move occurs, you are able to close the "wrong" side without losses, sometimes it is not possible, or the losses would be too big, so just keep the hedge. Since you have more size on the right side, you will make profit even in the drawdown. Eventually, price will turn and you will be able to exit the wrong side of the hedge in profit. Do not be greedy, DO EXIT WHEN YOU ARE IN PROFIT, otherwise you might get stuck in a drawdown forever, and that's when hedging gets really tricky...  

Target

The target is the most important part, you have to stick to the following rules, because this strategy needs to capture the big moves in order to offset the losses that you will inevitably get in sideways market. In sideways market you could get many small losses, but the big move will happen sooner or later, and you NEED TO CAPTURE IT, otherwise the strategy will fail. The targets are easy to find, just take the Equidistant Channel tool, make it 2 horizontal lines, and place the bottom line at the swing-low, and the top line at the 500EMA. Then take the tool, and forward the same distance one step up. You will get your first target. For the second and third target, just move your tool one more step up. It is kind of hard to explain with words, but if you watch the video, you will understand easily. You will see that many times it is a very accurate target, so make sure to always place your actual target a few pips before the line, to take into account your spread, and make sure that it gets hit. 

More Details

Technical analysis is VISUAL, it is NOT about thousands of different indicators which are all lagging anyway. It is visual, and this is exactly what the Rainbow Dragon does best: it shows you very clearly the support and resistance areas. When the rainbow lines are expanded, it means the big move is under way, the market is trending, and therefore you should stay out because price can retrace at any moment. When the rainbow is tight, all the lines are compressed, it shows you that it is an important support/resistance area, and that is when you have to look for the signal and be ready to enter because price will shoot up or down sooner or later. You might get some losses in the sideways market, but eventually the big move WILL HAPPEN, this is a certainty. Therefore you NEED TO CAPTURE IT. So do not try to cherry-pick your trades in the hope to minimize your small losses, otherwise you will end up missing the big move, and be left with losses only. Just make sure you are always in the same direction as the rainbow dragon. The dragon is capricious, evil, and cunning, and it will try all the tricks in the world to make you give up and end up in a loss, but if you are resilient and simply follow the dragon and ride it, you will be profitable. So don't give up, just keep at it until you capture the big move. Sometimes it means you have to stay awake all night, because you can never know when the move is going to happen, the only certainty is that IT WILL HAPPEN sooner or later, and you need to be there to capture it.

Why most traders fail ?

Most traders fail even with a good strategy, because they are not consistent. They cherry-pick their trades, and of course pick the wrong ones, and miss the good ones, because the market works in such a way that it will fool all of us, unless we are consistent. So print your strategy in your mind, and on a piece of paper, and place it above your screen, and follow it to the letter, as if you were a robot. Trade like a robot, do not let emotions take over.

Download our Rainbow Dragon Templates for MT4 

Some people have asked me for my Rainbow Dragon Template, because they think it looks great on the screen

and is very useful to have such a visual understanding of the important support and resistance levels.

Of course you can create a similar template yourself directly on your MT4 platform, but if you prefer, you can simply download it from me. The templates includes many moving averages of different colors that create the rainbow. There are templates ready-made for all the following charts: M1, M5, M15, M30, H1, and H4.

It also includes the 2 indicators below:

Auto-Pivots Indicator

The auto-pivots indicator calculates automatically and everyday the Daily, Weekly, and Monthly Pivots.

Most traders use this as a basic tool, it gives a clear indication where price is likely to stop, bounce, or react in some way.

This indicator was found freely on the internet, I do not know the name of the person who wrote the code.

I have made my own modifications regarding the colors, but I have not touched the code itself.

HG_0001a_MTF Indicator

This indicator means 'Holy Grail Multi Time Frames'. It was found freely on the internet as well, and I believe the creator went by the nickname of "TudorGirl".

This indicator is known to repaint, and for this reason many people find it useless, but the way I use it works well for me, since I trade more on the long term, and the repainting of a few candles does not really affect my trading decisions.

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