EMA rainbows are basically a combination of various different EMAs displayed on a price chart. They are referred to as rainbows because it's common to use different colours for the different EMA periods.

Anyway despite being very pretty to look at, these EMA rainbows can actually give you a very good snapshot of the current market. They can even provide good trading opportunities because when all of the EMAs congregate close together to form a narrow band, this is often the classic sign that a breakout is about to take place.

For example take a look below at the 4 hour chart of the GBP/USD pair. On this chart I have drawn EMAs covering periods 5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 55, 60 and 65.

Now you will see that there were two periods in recent weeks where these EMAs really came together to form a really narrow trading range. Both of these periods of consolidation resulted in a strong breakout so how could you have traded these breakouts?

Well what you could have done is entered buy and sell orders roughly 200 points away from the current trading range (at key trading levels which are very often round numbers).

So in the first instance you could have placed an order to buy at 1.5000 and an order to sell at 1.4600, and in the second and most recent instance you could have placed orders at 1.4400 and 1.4000. As you can see these orders would have caught the breakouts that occurred on both instances (although the latest one is still currently in progress), so this strategy would have yielded some decent profits.

I don't personally use this type of EMA rainbow system myself but hopefully I've given you a few trading ideas that you may like to develop further.