With the purpose of forecasting price changes, Bitcoin lovers have developed an extensive number of indicators and models, one of which is the Crypto Rainbow Chart.
With the purpose of forecasting price changes, Bitcoin lovers have developed an extensive number of indicators and models. The rainbow chart is one of the favorites, which is why we're examining it in this article.
While short-term traders dominate the cryptocurrency markets in terms of volume, a sizable portion of investors keep onto their cryptocurrency assets for a long period of time. They make an effort to buy Bitcoin close to the end of a bear market and hold onto it for a very long time, ideally in the final days of the bull market.
Timing these entrances and exits is difficult, but not impossible. Many traders have made an effort to simplify this by creating a number of indicators and models to predict future prices or to assist you in placing the price of Bitcoin into context. The Bitcoin Rainbow Chart is a tool designed to understand the price of Bitcoin in relation to its behavior over prior market cycles.
The rainbow chart can help traders ignore the daily volatility and take a broader view of Bitcoin. Also, viewers can infer a number of implications from the graph, but the rainbow itself teaches the most important lesson. The rainbow was designed as a fun, informative tool to help with buying and selling decisions. Each color includes particular instructions on whether to buy, sell, or hold.
Rainbow Chart of Bitcoin
The Bitcoin Rainbow Chart's initial version was very different from the current one. This initial version was created by Reddit user Azop only for the purpose of amusingly displaying Bitcoin's price history. While it first served as a reliable tool for making decisions, it wasn't long until BitcoinTalk member Trolololo came up with version 2.0, which combined the rainbow chart with logarithmic regression.
In many ways, exponential growth is the reverse of logarithmic decline. It is used for a variety of tasks, including tracking Bitcoin values and measuring the growth of young children. Throughout time, logarithmic growth slows down rather than speeds up. This makes sense in the context of Bitcoin because raising the price of Bitcoin requires a rising quantity of capital, which leads to diminishing returns.
The model made use of both the Bitcoin rainbow chart and logarithmic growth to make it applicable to both the present and the future. Since the model is still updated based on fresh price data, it will only get more precise over time.
How can you trade with the Bitcoin Rainbow Chart?
As mentioned above the rainbow chart has many different colors, and for each one, there is specific advice on the types of trades you may make when the price reaches that particular colored area:
Red: Sell. Red areas on the chart indicate selling. Technically, the Red zone has no maximum value, even though the graphic doesn't indicate that. The possibilities are literally endless.
Orange: "Is this a bubble?" and "FOMO escalates" are two orange zones on the graph. For cautious investors, these places can serve as the first spots to take profits, while more adventurous players interpret them as a sign that FOMO-fueled rallies are about to occur.
Yellow: Hold. Investors would be safe when staying out of this situation. Prices are neither high enough to start realizing profits, nor are they cheap enough to allow you to increase your holdings. The yellow region is essentially telling you to wait until prices go up.
Green: Continue to buy! As the price climbs back up and out of the blue portions of the chart, we move into the green (accumulate) and light green (still reasonably priced) bands. Even though the blue areas can seem a little terrifying, this is frequently where many people end up making purchases. Buying in the green areas is the best option since it doesn't seem nearly as terrifying as doing so in the blue areas since it is still early.
Blue: Buy Bitcoin. The lowest portions of the rainbow chart imply low prices. As the price moves into these ranges, a large number of Bitcoin enthusiasts increase their holdings of the cryptocurrency. Buying Bitcoin in the blue zone has historically been a smart choice. In a few months, we'll learn if this is successful once more. Although not being shown on the chart, the blue band has no lower boundary, just like the red zone. Prices may continue to drop once in the blue area.
Overall, one of the indicators that has been successful since its beginning is the rainbow chart. The red and blue areas have historically marked Bitcoin tipping points. However, investors should use the rainbow chart carefully to make trading decisions because it is not an exact science. The rainbow chart can be especially helpful when combined with other indicators and more research. Although the fear & greed index and the stock-to-flow model are excellent complements to the rainbow chart, we also advise utilizing your own analysis, whether it be fundamental or technical.
Disclaimer: The information herein is for educational purposes only and should not be considered financial, investment, or trading advice. Please conduct your own research and due diligence before making investment decisions. You understand that you are using the Information provided at your own risk.