Moving Average Envelope

Moving Average Envelope

Moving Average Envelopes consistof moving averages calculated from the underling price, shifted up and down bya fixed percentage. Moving Average Envelopes (or trading bands) can be imposedover an actual price or another indicator. When prices rise above the upperband or fall below the lower band, a change in direction may occur when theprice penetrates the band after a small reversal from the opposite direction.Shift is a double value specifying the percentage of shift for each movingaverage from the actual values.

They are used to indicateoverbought and oversold levels and can be traded on their own or in conjunctionwith a momentum indicator. It is used to identify trading ranges by the assumptionthat price should not deviate from the average of the underlying price element(high or low) by the percentage utilized.

When prices rise above the upperband or fall below the lower band, a change in direction may occur when theprice penetrates the band after a small reversal from the opposite direction.

Sometimes the moving average envelope is used to determine when a price is"cheap" or "expensive" it that in a strongly trending market, price is likely to stay in theupper part of the envelope for lengthy periods, and waiting for cheapness inthe test in such a market, may miss themajor part of the move.