Envelopes

Envelopes Technical Indicator is formed using two Moving Averages lines. The moving average is calculated and then one line is shifted upwards by a set percentage and the other line is shifted downwards by the same percentage. This is related to market volatility: the higher the latter is, the stronger the shift is. Envelopes define the upper and the lower margins of the price range.

Signals

  • Sell when the price reaches the upper line
  • Buy appears when the price reaches the lower line

The theory is based on the logic that over-enthusiastic buyers and sellers push the the price to extremes and hence when the price reaches these extremes the market will most likely turn and return to more realistic price levels.

Calculation:

  • Upper Band = (SMA, N) + (SMA, N x %)
  • Lower Band = (SMA, N) - (SMA, N x %)

SMA = Simple Moving Average (Exponential Moving Average may also be used)
N = Time period (e.g. 20 days)
% = Percentage to move the line by