Envelope

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

BREAKING DOWN '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. Oscillator

    A technical analysis tool that is banded between two extreme ...
  2. Oversold Bounce

    An oversold bounce is a rally in prices that occurs due to the ...
  3. STARC Bands

    A type of technical indicator that is created by plotting two ...
  4. Average Price

    1. A representative measure of a range of prices that is calculated ...
  5. Volatility Ratio

    A technical indicator used to identify price ranges and breakouts. ...
  6. Back-Of-The-Envelope Calculation

    An informal mathematical computation, often performed on a scrap ...
Related Articles
  1. Trading

    Moving Averages: Strategies

    By Casey Murphy, Senior Analyst ChartAdvisor.com Different investors use moving averages for different reasons. Some use them as their primary analytical tool, while others simply use them as ...
  2. Managing Wealth

    Using Technical Indicators To Develop Trading Strategies

    Unfortunately, there is no perfect investment strategy that will guarantee success, but you can find the indicators and strategies that will work best for your position.
  3. Trading

    Simple Moving Averages Make Trends Stand Out

    The moving average is easy to calculate and, once plotted on a chart, is a powerful visual trend-spotting tool.
  4. Trading

    Technical Analysis: Moving Averages

    By Cory Janssen, Chad Langager and Casey MurphyMost chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. ...
  5. Trading

    How To Apply Relative Strength Index With MetaTrader 4: Customizing RSI

    Traders have the option to change inputs or use the default settings. After the indicator has been selected, a RSIwindow will automatically appear. The window will have three tabs: Parameters ...
  6. Trading

    Exploring Oscillators and Indicators: RSI

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com The relative strength index (RSI) is another one of the most frequently used and well known momentum indicators in technical ...
  7. Trading

    How To Apply Bollinger Bands® With Metatrader 4: Understanding Bollinger Bands®

    Bollinger Bands®, shown in Figure 1, are one of the most widely used volatility indicators in today's market analysis. This technical indicator was developed by John Bollinger in the 198 ...
  8. Trading

    Using Trading Indicators Effectively

    Select multiple indicators, avoid information overload and optimize indicators to effectively use technical analysis tools.
  9. Investing

    Personal Income Tax Guide: Documentation And Records

    By Ken ClarkIf "location, location, location" is the most important rule in real estate, then "documentation, documentation, documentation" is by far the most important rule in taxes. Without ...
  10. Trading

    Support And Resistance Basics

    Understanding the concept of Support and Resistance in trading can drastically improve your short-term investing strategy.
RELATED FAQS
  1. 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 ... Read Answer >>
  2. How do I use Moving Average Envelopes to create a forex trading strategy?

    Discover how to use moving average envelopes to build a trading system in the forex market, including which indicators best ... Read Answer >>
  3. What is a common strategy traders implement when using Moving Average Envelopes?

    Read about some of the most common trading strategies and signals you can use with moving average envelopes on an asset's ... Read Answer >>
  4. How are Moving Average Envelopes calculated?

    Discover how to create a moving average envelope for a security or index and how to determine which time length and band-widths ... Read Answer >>
  5. What is the difference between Moving Average Envelopes and Bollinger Bands®?

    Read about the differences between how Bollinger Bands and moving average envelopes are constructed and what that means for ... Read Answer >>
  6. Why is the Moving Average (MA) important for traders and analysts?

    See why the statistical concept of moving averages plays a central role for traders and chartists who rely on technical analysis ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center