When you apply the envelope indicator, you will notice two lines or bands which appear above and below the price and these lines are called upper and lower envelopes.
The following graph provides an overview of how an envelope indicator would appear on your chart. Keep in mind that you should set the percentage value for the desired distance, and also you can change the number of moving average periods. You can easily plot the envelope channel on your chart by selecting it from the list of available indicators. Accordingly, you will define lower deviation percentages for instruments with low volatility. Lower band = 25-day SMA - (25-day SMA x 0.03)ĭuring periods of increased volatility or for assets with high volatility, traders should set a higher distance value or deviation percentages to avoid whipsaw. Upper band = 25-day SMA + (25-day SMA x 0.03) For instance, the calculation of the envelope for 25-day SMA and a 3% distance or envelop is as follows: Traders can set the distance based on their trading strategy or personal belief and preferences. Here SMA represents the simple moving average, N represents the number of periods used for the moving average and D is the deviation value which assigns the distance of the envelopes from the moving average. Lower band or envelope = SMAN - (SMAN x D%) Upper band or envelope = SMAN + (SMAN x D%) The formula for calculation of the envelope bands is:
The envelopes are plotted by setting the bands at a certain distance above and below the price. How to read the Envelope IndicatorĪn envelope bands calculation is usually done using moving averages where the simple moving average defines the upper and lower envelope, but traders can also use an exponential moving average. However, when these conditions are changing the price has the potential to move above or below the envelope bands, which signals possible trading positions. The idea behind this indicator is that the price has the tendency to remain within a certain range during normal market conditions. It is considered to be a trend and a lagging indicator.
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