Envelope

The Envelope indicator consists of two Moving Averages. The first is offset by a certain percentage above the moving average of the prices, and the second is offset by the same percentage downwards.

Example

Interpretation

The "Envelope" indicator defines the lower and upper limits of a normal price fluctuation band.

A sell signal is detected when the price reaches the upper limit, and conversely, a buy signal is detected when the price reaches the lower limit.

The optimal choice for the offset percentage depends on the volatility of the prices. The more volatile the prices, the higher this percentage must be.

The logic behind this indicator is that "trend-following" investors accentuate extreme price variations which then reach the lower or upper limits of the indicator; at this level, prices often stabilize before returning to more realistic values.

The interpretation is very comparable to that of Bollinger Bands.