Envelopes Indicator

Type of Indicator

The Envelopes indicator is a technical analysis tool consisting of two parallel lines plotted at a certain percentage above and below a moving average of the price. These lines, known as "envelopes," serve as volatility bands and help traders identify overbought and oversold conditions, as well as potential reversal points.

Purpose

The primary purposes of the Envelopes indicator are:

• Identifying overbought and oversold conditions,

• Helping determine potential price reversal points,

• Assessing the strength and momentum of price movements,

• Indicating possible support and resistance levels.

Calculation Method

The calculation of the Envelopes indicator involves several steps:

1. Moving Average (MA):

   • Typically, a simple moving average (SMA) based on the closing prices over a selected period (e.g., 20 days) is used.

     
     
   
   

1. Upper and Lower Envelopes:
   

   • Upper Envelope: Upper Envelope = SMA + (SMA × K)

   • Lower Envelope: Lower Envelope = SMA − (SMA × K) where KK is the percentage deviation from the moving average, usually ranging from 1% to 5%.

Trading Based on the Envelopes Indicator

1. Bounces Off the Envelopes:

   • When the price approaches the upper envelope, it may indicate overbought conditions and a potential reversal downward. This is a signal to sell.

   • When the price approaches the lower envelope, it…