Envelopes are a powerful technical indicator that can help traders identify price trends. This indicator consists of two moving averages: one shifted upwards and the other downwards. The key to using Envelopes effectively lies in adjusting the band margins according to market volatility. Essentially, the more volatile the market, the greater the shift of the bands.
Envelopes effectively set the upper and lower boundaries of the price range. A sell signal is triggered when the price hits the upper band, while a buy signal emerges when it reaches the lower band.
The underlying principle of Envelopes is that when buyers and sellers get overly enthusiastic, they can push prices to extremes (the upper and lower bands). Typically, this leads to a price correction, bringing it back to more reasonable levels. This concept is quite similar to how Bollinger Bands® work.
Envelopes indicator
How to Calculate Envelopes:
UPPER BAND = SMA (CLOSE, N) * [1 + K / 1000]
LOWER BAND = SMA (CLOSE, N) * [1 - K / 1000]
Where:
- UPPER BAND - the upper line of the indicator;
- LOWER BAND - the lower line of the indicator;
- SMA - Simple Moving Average;
- CLOSE - the closing price;
- N - the averaging period;
- K / 1000 - the shifting value from the average (measured in basis points).
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