What Is an Envelope?

Envelopes are technical indicators that are typically plotted over a price chart with upper and lower bounds. The most common example of an envelope is a 澳洲幸运5开奖号码历史查询:moving average envelope, which is created using two moving averages that d🔯efine upper and lower price range le❀vels.

Envelopes are commonly used to help traders and investors identify ♓extreme overbought and oversold conditions as well as trading raꦯnges.

How Envelopes Work

Traders can interpret envelopes in many different ways, but most use them to define trading ranges. When the price reaches the upper bound, the security is considered 澳洲幸运5开奖号码历史查询:overbought, and a sell signal is generated. Conversely, when the price reaches the lower bound, the security is considered oversold, and a buy signal is generated. These strategies are based on 澳洲幸运5开奖号码历史查询:mean reversion principles.

The upper and lower bounds are typically defined such that the price tends to stay within the upper and lower thresholds during normal conditions. For a volatile security, traders may use higher percentages when creating the envelope to avoid whipsaw trading signals. Meanwhile, less volatile securities may necessitate lower percentages to create a sufficient number of 澳洲幸运5开奖号码历史查询:trading signals.

Envelopes are commonly used in conjunction with other forms of 澳洲幸运5开奖号码历史查询:technical analysis to enhance the odds of success. For example, traders may identify potential opportunities when the price moves outside of the envelope and then look at chart patterns or volume metrics to identify when a tipping point is about to occur. After all, securit🧸ies can trade at overbought or oversold conditions for a prolonged p🥂eriod of time.

Example of an Envelope

Moving average envelopes are the most common type of envelope indicator. Using either a simple or 澳洲幸运5开奖号码历史查询:exponential moving average, an envelope is created b𝓰y defining a fixed percentꦍage to create upper and lower bounds. 

Let's take a look at a five percent simple moving average envelope for the S&P 500 SPDR (SPY):

The calculations for this envelope are:

$\begin{aligned} &\text{Upper Bound} = \text{SMA}_{50} + \text{SMA}_{50}*0.05\\ &\text{Lower Bound} = \text{SMA}_{50} - \text{SMA}_{50}*0.05\\ &\text{Midpoint} = \text{SMA}_{50}\\ \\ \textbf{where:}&\\ &\text{SMA}_{50}=\text{50-day Simple Moving Average} \\ \end{aligned}$where:​Upper Bound=SMA50​+SMA50​∗0.05Lower Bound=SMA50​−SMA50​∗0.05Midpoint=SMA50​SMA50​=50-day Simple Moving Average​

Traders may have taken a short position in the 澳洲幸运5开奖号码历史查询:exchange-traded fund when the pಌrice moved beyond the upper range and a long position when the price moved below the lower range. In these cases, the trader would have benefited from the reversion to the mean over the following period♌s.

Traders may set 澳洲幸运5开奖号码历史查询:stop-loss points at a fixed percentage beyond the upper and lower bounds, while 澳洲幸运5开奖号码历史查询:take-profit points are often set at the midpoint line.