Rainbow Oscillator Signals from Smoothed Averages and Price Range

Summary

This document describes a long/short approach using the Rainbow Oscillator (RO), calculated from the close’s deviation from a smoothed average and normalized by a recent high-low range. Positive RO values indicate price above the average and negative values indicate price below it. A bandwidth measure compares the spread among a stack of moving averages with the same price range, intending to describe market stability.

The accompanying source builds ten successively smoothed averages, uses their mean in the oscillator, and enters long or short according to the sign of RO; an option reverses the direction. Bandwidth is plotted as context but does not gate entries. The document provides no performance results, despite describing the method as a backtesting strategy. Its prose and implementation also differ: the prose refers to a 10-period average and price extremes, while the code uses a stack of averages and recent close extremes. It cautions that parameter choices, false signals, frequent trading, unsuitable test markets, and omitted trading costs can impair live results.

Key ideas

• The oscillator compares the close with an average of successively smoothed prices and scales the deviation by a recent price range.
• Positive and negative oscillator readings determine long and short positions, with an optional setting to reverse those directions.
• The bandwidth indicator measures the spread among smoothed averages relative to the recent price range, but it does not control entries in the code.
• The written formula and the implementation differ in their averaging and range inputs.
• The document warns that false signals, parameter choices, frequent trading, and unmodeled costs can weaken real-world performance.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.