How do I read the BTC Rainbow Chart?
The interpretation of the Bitcoin rainbow chart is relatively simple. There are 9 bands within the logarithmic regression which highlight different levels within the logarithmic range of overbought, or oversold conditions. In summary, you can read the rainbow chart as follows:
- Blue = A fire sale (cheap)
- Light Blue = A buy
- Green = Accumulation zone
- Yellow = HODL (neutral)
- Orange = Is this a bubble? (becoming overbought)
- Dark Orange = FOMO intensifying (becoming more overbought)
- Red = Overbought, sell
- Dark Red = Bubble territory
What is the Bitcoin Rainbow Chart?
The Bitcoin rainbow chart is a colorful version of a basic logarithmic regression chart that highlights how the price of Bitcoin and its price range has evolved. The genesis of the rainbow chart dates back to 2014 when Reddit user azop shared it for the first time on the original Bitcoin forums.
The regression model was then improved by another user on the BitcoinTalk forum, which helped the model become more dynamic and accurate.
How is the Bitcoin Rainbow Chart used?
The Bitcoin rainbow chart can be used to track market movements and find optimal trade entries. The chart is easy to understand and can be used by both beginner and experienced investors.
The chart can also be used to spot trends and patterns. For example, if the price is consistently above the red line, it may be indicative of an overbought and overhyped trend. Conversely, if the price is consistently below the dark blue line, it may be indicative of a bearish trend.
The Bitcoin Rainbow Chart is not perfect, but it can be a helpful tool for those looking to take advantage of market trends.
What are the limitations of the Bitcoin Rainbow Chart?
The biggest limitation of the Bitcoin rainbow chart is that it is a lagging indicator. This means that by the time a trend is spotted on the chart, it may already be over. The chart is also limited to tracking price movements on a logarithmic scale. This means that it is not possible to use the chart to track absolute or immediate price movements.
Despite these limitations, the Bitcoin rainbow chart can still be a helpful tool for those looking to take advantage of market trends.