Moving average envelope indicator

The moving average envelope indicator is based on the moving average indicator but adds another important feature: the envelope. The envelope consists in two bands situated above and below the moving average at a fixed percentage named “envelope factor”. The two lines will be parallel to the central moving average.

The upper and lower lines are calculated using the moving average of the currency price and the envelope factor following these formulas:

Hiband = MA + pct x MA

Loband = MA - pct x MA,

where MA = moving average, pct = percentage of envelope factor

The percentage used for this indicator can be adjusted according to the currency pair and to the period of time is applied to. As an example, for a 14 day moving average you can use a 1% envelope factor or for a 21 day moving average period you can use a 1.5% envelope.

The envelope settles the upper border and the bottom border of the normal moving of the currency price.

The moving average envelope indicator is used based on the principle that in case of bigger changes the price level goes back to the basic trend which is the central moving average.

If the price of a currency is close or touching the upper band for an extended period of time the correct interpretation is that the currency’s price has an upper trend. If the price is close or crossing the bottom band than is a down trend.

After a complete analysis and a good selection of the envelope factor the upper band can be used as a resistance and the bottom band as a support line. If the price moved upper the moving average and crosses over the upper line is recommended to sell. To buy it’s the other way around: if the price went down and touches the bottom line you are advised to buy.

The moving average envelope technique is in most of time used to identify the general trend of a currency and its strength and not for actual buy and sell signals. Being based on an average indicator this technique is late, reacting slow to the fast changes like all average indicators.

The moving average envelope technique is recommended to be used for short term investments because the indicator becomes useless if the price goes over the lines and starts a new trend. In order to avoid losses the trader should place stop loss at the previous high when selling and at the previous low when buying.