The cloud bow is formed in cloud droplets which are much smaller in size than rain drops. The white light entering a cloud droplet has a larger range of exit angles which results in an overlapping of colors and the lessening of color intensity. This diffraction effect in small droplets broaden the bow, thins a colorful rainbow into a near white cloud bow.

The cloud bow is often visible from an airplane flying over a sunlit cloud deck. Sometimes, especially during sunrise or sunset, the cloud bow is visible to an observer on the earth. It may then appear in altocumulus or stratocumulus clouds on which the sun shines from below and on the edges. With low sun elevations, the cloud bow is usually colored red, because the sunlight is reddened by atmospheric scattering.