📌 What is an Envelope?
In trading, there are various technical analysis indicators, and one of them is the Envelope. Envelope is a trading strategy that involves drawing specific bands above and below the price using moving averages to assess volatility and make trading decisions. In this blog, we will explore the concept and application of the Envelope, as well as other valuable indicators to consider.
📈 Definition and Meaning of the Envelope
The Envelope is a technical analysis indicator that draws bands around a moving average to confirm price volatility and aid in making trading decisions. Typically, a 20-day moving average is used to assess price trends, and upper and lower bands are drawn above and below the price, respectively.
In most cases, when using a trading platform (HTS), the term “Period” or “Window” refers to D1 or the spread, which is the percentage ratio for the desired bands based on the moving average. For example, with Period = 20 and Spread = 0.5, the Upperband is the line representing a 0.5% increase from the 20-day moving average, and the LowerBand is the line representing a 0.5% decrease.
Formula
Upper Band = Moving Average + (Moving Average * Band Ratio)
Lower Band = Moving Average – (Moving Average * Band Ratio)
📈 Utilizing the Envelope as an Investment Indicator and Strategy
The Envelope can be used to gauge price movements between the Upperband and LowerBand. As a basic approach, when the price touches the LowerBand and then rises with a lower shadow or a long white candle, it may be a buy signal. Conversely, when the price touches the Upperband, it may be a sell signal.
For upward-trending stocks, there might be instances when the price exceeds the Upperband, indicating a desire for additional purchases. To be on the safe side, it is advisable to buy before the price surpasses the Upperband. This is because a strong upward trend might trigger a trend reversal.
When the price exceeds the Upper Band, it may be interpreted as overbought, leading to a sell signal. Conversely, when the price falls below the Lower Band, it may be interpreted as oversold, resulting in a buy signal.
The Envelope can be combined with other indicators to assess trend strength, reversal signals, and more.
📈 Other Valuable Indicators to Consider
- Bollinger Bands: Used to measure price volatility and analyze trends and volatility through upper and lower bands.
- Moving Average: Helpful in understanding trend direction and flow.
- MACD (Moving Average Convergence Divergence): Used to assess trend strength and reversal signals.
🌊 Limitations or Drawbacks of the Envelope:
The Envelope is mainly used to gauge short-term price movements, and long-term trend changes should be considered along with other indicators.
Some traders do not rely solely on Envelope signals for trading but combine them with volume, Bollinger Bands, MACD, turning points, and other indicators for more informed decisions.
The Envelope may not be sufficient for determining the strength or direction of a trend on its own.
The Envelope, with its bands drawn above and below the price, is a trading strategy that analyzes trends and volatility. It provides both buy and sell signals, but to accurately capture long-term trend changes, it is advisable to combine it with other indicators and rely on the trader’s experience and judgment.