What is an Moving Average Envelope? -- An Envelope is two Moving Averages simply measuring the average price of a stock, commodity or index over a specific time frame. They can help gauge the overall direction of a current trend or changes that could be coming.
There are many types of moving averages and ways of interpreting them. One technique is to buy stocks above a moving average and sell when crossing below. Many people will watch, or example, a 10 or 20-period Envelope break for short-term directional insights. Some wait for a 50-period moving average break for near-term insights. Longer-term traders focus on a 200-period moving average test for greater bigger trend insights.
An Envelope can be used as a support and resistance levels for buying, selling or reversal trades. They can be used for crossover trades when the price moves through a particular moving average, or when two key moving averages crossover each other.
Typically the stock, index or futures contract will move within the envelope in a range above and below it. This movement is used to help gauge overbought or oversold conditions.
When prices move above or below the envelope, then one of two things may occur. The stock has moved too far, too fast and will snap back to the average, or the price movement outside the envelope may be signaling that the overall trend could be changing. One strategy is to trade the extreme moves closest to the upper or lower envelop.
Envelope Channeling Technique
Another technique for trading Envelopes is to set the envelop settings to form more slightly displaced with the same setting but different calculation point to form more a channel.
With this setting we are not focusing so much on overbought or oversold conditions but, rather, you are trying to identify those stronger trends that may b be running out of steam and could be setting up for reversals. Using this technique one of the equal but slightly different Envelopes may be crossed but the reversal is not officially recognized until the Envelope is crossed by the price line.
