Envelopes
Last updated
Last updated
Envelopes are a type of technical indicator that consists of two bands placed above and below a moving average. These bands adjust dynamically based on the volatility of the price. The purpose of Envelopes is to help traders identify overbought and oversold conditions, as well as potential trend reversals.
Traders use Envelopes to gain a clearer picture of market trends and price volatility. By setting bands around a moving average, Envelopes provide visual cues about when the price is moving too far from its average, indicating possible entry or exit points. This can help in making more informed trading decisions by highlighting significant price movements.
Envelopes are created by calculating a moving average and then placing two bands at a specified percentage above and below this average. The distance of the bands from the moving average is determined by the volatility of the price. When the market is more volatile, the bands widen, and when it is less volatile, the bands narrow.
For example, if you set the Envelopes with a 20-period simple moving average and a 2% envelope, the upper band will be 2% above the moving average, and the lower band will be 2% below it. These bands will adjust as the moving average changes with the price.
Price Touches Upper Band. When the price reaches or exceeds the upper band, it may indicate that the asset is overbought. This could be a signal to consider selling or taking profits.
Price Touches Lower Band. When the price touches or falls below the lower band, it may suggest that the asset is oversold. This could be a signal to consider buying or entering a long position.
Trend Confirmation. If the price consistently stays above the moving average and near the upper band, it confirms an uptrend. Conversely, if the price remains below the moving average and near the lower band, it confirms a downtrend.
Envelopes can be used in various ways to enhance your trading strategy:
Identifying Overbought/Oversold Conditions. Use the bands to spot when the price is moving too far from the average, signaling potential reversals.
Trend Following. Confirm the direction of the trend by observing whether the price is mostly above or below the moving average and which band it is closer to.
Setting Stop-Loss and Take-Profit Levels. The bands can help in determining appropriate levels for placing stop-loss orders and taking profits based on price movements relative to the bands.
Objective: Use the Envelopes indicator to identify overbought and oversold conditions and make trading decisions on a real asset.
Scenario: Trading EUR/USD on a 1-Hour Chart
Set Up the Indicator:
Open your trading platform and select the 1-hour chart for the EUR/USD currency pair.
Add the Envelopes indicator with the following settings:
Moving Average: 20-period simple moving average (SMA)
Percentage: 2%
Identify Overbought Conditions:
Watch for the price to approach or touch the upper band.
This may indicate that EUR/USD is overbought.
Consider taking profits on long positions or looking for short opportunities.
Identify Oversold Conditions:
Look for the price to approach or touch the lower band.
This may suggest that EUR/USD is oversold.
Consider entering a long position or exiting short positions.
Monitor Trend Direction:
Observe if the price consistently stays above the moving average and near the upper band, confirming an uptrend.
Alternatively, if the price remains below the moving average and near the lower band, it confirms a downtrend.
Use this information to align your trades with the prevailing trend.
Review Your Trades:
Keep a record of your buy and sell decisions based on Envelopes signals.
Analyze the outcomes to see how effectively Envelopes are guiding your trades.
Adjust your strategy if needed to improve accuracy and profitability.
Spoiler alert: this indicator will be used in 7 out of 40 trading strategies of this guide.
