The Envelopes Indicator’s main purpose helps identifies price overbought and oversold conditions, in this regard – The Envelopes Indicator helps identify the entry point and/or as well as the exit point. The Indicator will furthermore identify possible trend break-downs.
The Indicator as you will be able to identify in a chart consist of two SMA‘s. The abbreviation stands for Simple Moving Average. These two SMA‘s forms a channel in which the prices envolves within it, making it flexible.
The SMA forms an upper band and a lower band and each has its own calculation.
- Upper Band = SMA(CLOSE, N)*[1+K/1000]
- Lower Band = SMA(CLOSE, N)*[1-K/1000]
The N in the above calculations is the averaging period whereas K/1000 is the value of shifting from the Avg. this is usually measured in basis points.
MA‘s where the averages are plotted at a constant percentage, of which can be adjusted according to the moving prices of the market. Every line in the Envelope Indicator serves as a margin of the price fluctuation range.
In this Indicator, as we explained the purpose as identifying price overbought and price oversold conditions – well, it is often said that in a trending market it’s best to take only oversold signals in an uptrend condition whereas the overbought signals in a downtrend condition.
In the ranging market:
- Prices reached the top line serves as a signal to sell.
- Prices reaching the bottom line serves as a signal to buy.