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Glossary

Moving Average Envelopes

Technical Indicator

Moving Average Envelopes is a technical indicator that is used to help traders identify potential points of support and resistance in market trends. Essentially, Moving Average Envelopes are formed by plotting two bands, one above and one below a moving average line. The width of these bands can be adjusted to reflect different levels of volatility in the market.

The upper band represents a level of resistance, while the lower band represents a level of support. When the market price moves towards either of these bands, it is likely to encounter some resistance or support, respectively. This can be useful for traders who are looking to enter or exit trades at key levels.

The formula for Moving Average Envelopes involves calculating two moving averages (MA): a simple moving average (SMA) and an exponential moving average (EMA). The SMA is calculated by averaging a set number of closing prices over a specified time period (such as 20 days). The EMA is calculated in a similar way, but it gives more weight to recent prices.

Once the two moving averages have been calculated, the trader should plot two lines that are a set percentage above and below the EMA. For example, a trader might choose to plot a 10% envelope, which means the upper line would be 10% above the EMA and the lower line would be 10% below the EMA.

The formula for the upper envelope is:

Upper Envelope = EMA n (1 + Percentage)

The formula for the lower envelope is:

Lower Envelope = EMA n (1 - Percentage)

As the market price moves up or down, the envelopes will expand or contract accordingly. When the market approaches the upper or lower band, traders watch for confirmation of a trend reversal before making a trading decision.




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