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. Keltner Channel

    A volatility based 'envelope' indicator that measures the movement ...
  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. Bollinger Band®

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

    1. A situation in which the demand for a certain asset unjustifiably ...
  6. Price Band

    A value-setting method in which a seller indicates an upper and ...
Related Articles
  1. Active 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. Technical Indicators

    Discovering Keltner Channels and the Chaikin Oscillator

    It's time to acquaint yourself with some lesser-known yet effective technical indicators.
  3. Technical Indicators

    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.
  4. Options & Futures

    The Top Technical Indicators For Options Trading

    Options traders have to pay attention to more indicators than your average stock trader does, including volatility, direction, and duration.
  5. Active Trading Fundamentals

    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.
  6. Trading Strategies

    Relative Strength Index (RSI)

    Learn more about this technical momentum indicator that determines whether an asset is overbought or oversold.
  7. Trading Strategies

    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. ...
  8. Active Trading

    Moving Averages: Factors To Consider

    By Casey Murphy, Senior Analyst ChartAdvisor.com Data Used in Calculation Most moving averages take the closing prices of a given asset and factor them into the calculation. We thought it would ...
  9. Insurance

    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 ...
  10. Technical Indicators

    The Four Most Commonly-Used Indicators In Trend Trading

    Here are the top indicators and tools trend traders use to establish when trends exist and to find entry/exit points.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. What is a common strategy traders implement when using the Money Flow indicator?

    Learn a common trading strategy traders implement with the money flow indicator to identify profitable trade entry and exit ... Read Answer >>
  6. What are the best indicators to identify overbought and oversold stocks?

    Learn about the interpretation of the relative strength index and stochastics, two of the most popular indicators of overbought ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center