Envelope

AAA

DEFINITION of 'Envelope'

A type of technical indicator typically formed by two moving averages that define upper and lower price range levels. An envelope is a technical indicator used by investors and traders to help identify extreme overbought and oversold conditions in a market. The envelopes, which typically appear overlaid on a price chart, are also useful in identifying trading ranges for a particular trading instrument.

A moving average envelope calculates two moving averages using the high price and low price inputs. Both averages are calculated using price data from the same number of bars, as determined by the input length. The average of the high price is increased by a user-specified percent and then plotted; the average of the low price is reduced by a user-specified percentage and then plotted. The envelope inputs can be customized to suit each investor's or trader's style and preferences.

envelope pattern

INVESTOPEDIA EXPLAINS 'Envelope'

While traders may interpret and apply the information in unique ways, many traders use an envelope so that a sell signal occurs when price reaches the upper band, signifying an overbought market, and a buy signal occurs when price drops to the lower band, representing an oversold market. Since a trading instrument's price tends to stay within the range represented by an envelope, the theory is that prices will continue to bounce between the upper and lower thresholds.

RELATED TERMS
  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth ...
  2. Chartist

    An individual who uses charts or graphs of a security's historical ...
  3. Consolidation

    In technical analysis, the movement of an asset's price within ...
  4. Gann Angles

    Created by W.D. Gann, a method of predicting price movements ...
  5. Bollinger Band

    A band plotted two standard deviations away from a simple moving ...
  6. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
Related Articles
  1. Moving Average Envelopes: Refining A ...
    Forex Education

    Moving Average Envelopes: Refining A ...

  2. Moving Averages
    Active Trading

    Moving Averages

  3. Playing Penny Stock-Like ETFs
    Stock Analysis

    Playing Penny Stock-Like ETFs

  4. Hypothesis Testing in Finance: Concept ...
    Active Trading Fundamentals

    Hypothesis Testing in Finance: Concept ...

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center