What are Envelopes ?
First, let’s take a look back at the moving average.
The purpose of using moving averages is to identify trend changes.
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Although moving averages are a useful tool and are always ready to use in your technical software, they can sometimes give false signals.
As you learned in previous lessons about moving averages, a simple buy signal is issued when prices close above the moving average.
And when the price closes below the moving average, a simple sell signal occurs.
For example, suppose EUR / USD is moving up and closing above a moving average, which is a signal for a buy trade.
How do you know that this uptrend is “real” and will continue?
you do not know.
So assuming you still want to buy, you have two options:
- Buy now based on the initial signal to enter the trade (the price is closed above the moving average).
- Wait for more confirmation to make sure the process is real.
This is where envelope moving envelopes (MAEs) can go a long way.
What? Movable average envelopes?
What is a Moving Average or Envelops Indicator?
A moving average envelope consists of a moving average and two other lines.
One line is above the moving average and the other line is below the moving average.
These two lines together form an envelope at the top and bottom.
How to use the Envelops indicator or moving average envelopes
The image above is called an envelope because these two lines cover the main moving average and somehow fit inside the envelope.
Envelops are used for:
- Approve the process
- Identify conditions for over-buying and over-selling
How to calculate moving average envelopes
How to calculate a moving average envelope is very simple.
First decide whether you want to use a simple moving average (SMA) or an exponential moving average (EMA).
Remember, EMAs are less late because they give more weight to recent prices.
Then, select the desired number of time periods.
Finally, set the percentage you want to use for the envelopes.
For example, a 10-day moving average with an envelope of ٪ shows the following lines:
Top envelope : Ten-day SMA + (ten-day SMA * 1%)
10-day SMA
Bottom envelope : Ten-day SMA – (Ten-day SMA * 1%)
The chart below shows the EUR / USD with a 10-day moving average and a 1% envelope.
How to use the Envelops indicator or moving average envelopes
Notice how the envelopes (blue lines) move parallel to the 10-day SMA (orange line).
They are always fixed ۱ below and above the moving average (orange line).
Envelops indicator in MetaTrader 4
In MetaTrader 4 trading platform, the possibility of using moving average envelopes is included by default.
To do this, first put your main Moving Origin indicator on the chart. Then find Envelopes in the list of MetaTrader indicators and drag on the chart. By setting the moving average type, moving average period as well as deviation percentage, the average envelope will be drawn on the chart.
How to use the Envelops indicator or moving average envelopes
How to process using Envelops indicators confirm
Because moving average envelopes (MAEs) are essentially moving averages, moving average envelopes can be used as a trend indicator.
Determines the direction of the moving average of the envelopes.
When envelopes go up, the price is on an uptrend.
When the envelopes go down, the price is in a downward trend.
When envelopes move horizontally, the price is neither up nor down. In this case, the trend is neutral and the price is considered directionless.
You need to pay attention to when the price moves above or below the envelope.
Because trends usually start with a strong move, the market is considered bullish if the price moves sharply above the upper envelope.
If the price falls below the bottom envelope, the market is considered downtrend.
Buy signal
If the price is higher than the top envelope, buy.
Sales signal
If the price is closed below the lower envelope, sell.
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Example: GBP / USD
In the chart below, see how the 20-day simple moving average (orange line) and the top and bottom envelopes (blue lines) go up and down.
How to use the Envelops indicator or moving average envelopes
See how the price has managed to close above the moving average ?
To confirm that the trend has changed from bearish to bullish, you can wait for the price to close above the upper envelope .
How to identify levels of overselling and overselling with moving average envelopes
There are times when the price first goes above the upper envelope or goes below the lower envelope but then returns.
This usually happens when the slope of the moving average is FLAT or flat.
When this happens, moving average envelopes can be used to identify levels of overselling and overselling.
When the price moves above the upper envelope, it can be considered an oversupply.
When the price moves below the bottom envelope, it can be considered as overselling.
Identifying levels of over-buying and over-selling is not easy.
Remember, when the trend is strong, a pair can be more shopping and more shopping to stay .
The same is true in the case of overselling. In a sharp downtrend, an asset can be technically over-sold and over-sold, but remain the same over-sale for a long time.
For this reason, it is better to pay attention to the slope of the moving average and make sure that it is flat.
You need to verify the buy and sell levels with the support and resistance levels.
Buy signal
If the price touches the bottom envelope or falls below it and then goes up again, buy.
Sales signal
If the price touches a high envelope or rises above it, and falls down again, sell.
Example : EUR / JPY
In the diagram below, see how the 30 SMA (line (orange) and the top and bottom envelopes (blue lines) are flat. They are almost uniformly horizontal.
How to use the Envelops indicator or moving average envelopes
EUR / JPY is directional in the image above. There is no strong uptrend. There is no strong downtrend.
Notice how the top envelope acts as a strong resistance level.
Whenever the price is traded near the top envelope, the price goes down again.
The same is true for the bottom envelope. Notice how it acts as a strong level of support.
Whenever the price was traded near the bottom envelope, the price reacted and went up again.
Summary
Packets moving average (MAE) or Envelops as a means of coming to the process used, but either side could suffer markets to identify levels over the buying and selling more of them.
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