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. Gann Angles

    Created by W.D. Gann, a method of predicting price movements ...
  3. Chartist

    An individual who uses charts or graphs of a security's historical ...
  4. Bollinger Band

    A band plotted two standard deviations away from a simple moving ...
  5. Consolidation

    In technical analysis, the movement of an asset's price within ...
  6. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
Related Articles
  1. Technical Indicators

    What are the best technical indicators to complement the Moving Average Envelopes?

    Learn how moving average envelopes can be used with a wide variety of different technical indicators and oscillators to spot trading opportunities.
  2. Forex Education

    Moving Average Envelopes: Refining A Popular Trading Tool

    Traders can benefit from experimenting with envelopes, which help spot trends after they develop.
  3. Active Trading

    Moving Averages

    Discover one of the most reliable indicators in technical analysis and learn how to incorporate it into your trading routine.
  4. Chart Advisor

    Trade Strong U.S. Small Caps with this ETF

    While most investors focus on the Swiss franc, quantitative easing or other global economic indicators, small-cap stocks have been outperforming.
  5. Active Trading Fundamentals

    Minute-to-Minute Trade Signals for Today's Scalper

    Scalpers profit in the modern electronic environment by utilizing technical indicators that are custom-tuned to very small time frames.
  6. Chart Advisor

    These 4 Stocks are Hitting Technical Headwinds

    These up trending stocks are showing signs of weakness, indicating it may be time to sell.
  7. Forex Strategies

    How do I implement a forex strategy when spotting a Three White Soldiers Pattern?

    Learn two variations, one aggressive, one more conservative, of a forex trading strategy that can be used with the three white soldiers candlestick pattern.
  8. Technical Indicators

    How do I implement a forex strategy when spotting a Three Black Crows Pattern?

    Learn a common forex trading strategy traders use to capitalize on the bearish market reversal signal given by the three black crows candlestick pattern.
  9. Technical Indicators

    How are Three White Soldiers patterns interpreted by analysts and traders?

    Understand the basics of the three white soldiers candlestick pattern and how this bullish reversal signal is interpreted by analysts and traders.
  10. Trading Strategies

    How effective is creating trade entries after spotting a Three White Soldiers pattern?

    Understand the basics of the three white soldiers pattern and what conditions are optimal for creating effective trade strategies based on this reversal pattern.

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center