Why Should You Learn Reading Ethereum Rainbow Chart?

Trading in financial markets is challenging because the economy is a complex system, and multiple scenarios and factors affect how you make money.

Cryptocurrencies emerged around 15 years ago and became one of the hottest topics in trading due to their variety, volatility and usability. Over the years, thousands of these digital currencies came into existence, but only several tens of them remained and provided real use cases.

Traders have been careful with investing in cryptocurrencies because they are highly volatile and involve multiple risks. Therefore, more trading tools and analyses have been founded to aid traders in making informed investment decisions.

Today, we will discuss the Ethereum rainbow chart, which showcases previous trends using Ethereum price history data and how to use it.

Understanding The ETH Rainbow Chart

The Ethereum rainbow chart is a graphical representation of previous ETH price movements over the years, which some use to draw future predictions. This chart option casts this crypto’s price trend on a logarithmic graph that visualises the overall ETH price over around ten years.

This is a technical analysis tool used to identify market sentiment, and it suggests a preferable market execution order that can be profitable. 

The logarithmic growth curve can be complicated to read for the average trader. Therefore, it was complemented with coloured bands consisting of 9-coloured layers that are easier to read and analyse. 

The ETH rainbow chart was first developed in 2014 by a Reddit crypto account named “azop”, who suggested using an algorithmic regression model to analyse historical Bitcoin prices. The model was later modified to a coloured graph, known currently as the Rainbow Chart.

A crypto enthusiast later implemented the same model to the Ethereum network, drawing similar estimations and coming up with the Ethereum rainbow chart.

How To Read The Rainbow Chart?

The multi-coloured Ethereum rainbow chart uses a logarithmic chart instead of a linear one due to the nature of ETH price action. Most charting options used in trading platforms use the classic linear chart, which shows the price trend moving up and down in a linear manner.

However, the logarithmic charting option that the rainbow chart uses illustrates Ethereum’s historical price performance over a given period of time. In the case of ETH Rainbow, most charts show data from 2014 until 2023 or 2025.

Each colour of the Ethereum rainbow chart represents a distinct market condition and explains the status of the asset at that time. For example, if the price of Ethereum is moving inside the dark red band, it means the asset is strongly overbought, and the price will settle down in no time, or a sell market order.

Traders use this chart to compare the price of Ethereum with past price trends to draw possible future price movements, coming from the belief that market cycles repeat themselves. 

The Meanings of ETH Rainbow Chart Colours

Each layer of the chart carries different meanings to make it easier to read and analyse historical price movements. These are from the top down:

• Dark red: The market is growing a bubble, suggesting a sell order.
• Red: The asset is highly overbought – consider selling.
• Dark orange: An increasingly bullish market as traders experience FOMO on the market trend.
• Orange: The market is surging with an increasing buy movement.
• Yellow: A balanced market – time to HODL.
• Light green: Prices are cheaper, representing a good entry point.
• Green: The market price is low and undervalued – consider buying.
• Blue-green: The asset is highly undervalued. Buy before a bullish run starts.
• Light purple: The market is at an extremely low point, and a crash might occur. The perfect time to buy.

Predicting ETH Future Prices With Rainbow Chart

The Ethereum rainbow chart shows various price movements using historical price data. Thus, it is used to understand the current price by referencing it to a given historical trend.

Therefore, it is not used as investment advice or a tool to predict future prices because of its limitations. The Ethereum rainbow chart does not take into consideration current events and unprecedented occurrences in Ethereum’s price.

It is possible to use it in conjunction with other technical analysis tools whether you should buy Ethereum or not. However, it is more of a visual reference point to read the price chart and compare price levels than a clear-cut strategy. 

The Ethereum rainbow chart does not include current and future developments in the Ethereum network, new Ethereum staking campaigns or roadmap updates, which can highly affect the coin price.

Ethereum Rainbow Chart Advantages

After understanding how the Ethereum rainbow chart works, let’s go through some of its advantages and why using it is a good idea.

• The chart is an easy-to-understand technical tool that explains the market sentiment and ETH price movements using layers and colours.
• It is a good comparison tool to analyse market trends and price levels between different cryptocurrencies.
• The Ethereum rainbow chart can be part of predicting the future price of Ethereum based on market cycles.

Ethereum Rainbow Chart Disadvantages

Despite the easy visual representation this crypto rainbow chart provides, there are some limitations that you need to consider.

• There is no standalone tool that can be used to accurately predict future prices, especially in the highly volatile crypto market.
• The Ethereum rainbow chart has a limited timespan compared to the Bitcoin rainbow chart, which dates back to 2010. Therefore, some predictions and analyses may be inaccurate.
• It does not include external factors like governmental regulations, economic conditions and general technological advancements.
• It does not include changes in the Ethereum ecosystem, like the Ethereum 2.0 or sharding network update.

Conclusion

The Ethereum rainbow chart is a great technical tool for analysing Ethereum’s price past performance and historical trends and how they affected traders’ decisions and market sentiment. 

This tool uses a logarithmic regression model with coloured bands and layers that explain the market condition in each ETH price movement. 

Using the Ethereum rainbow, traders can read historical price charts and understand how the traders responded to each trend change. This tool can be used to predict future prices. However, it has several limitations that make it difficult to predict potential market trends accurately.