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Moving Average Envelope
You can see on the chart in the form of two lines: the bottom line is the moving average displaced downwards while the top line is the moving average displaced upwards. In addition, the Moving Average Envelope demonstrates a range of the prices' discrepancy from Moving Average.
Formula.
The indicator consists of three lines:
The top line:
The bottom line:
Chart:
Moving Average Envelopes consist of 2 moving averages, which are calculated as simple, exponential, etc. One of the moving averages displaces upwards. The other moving average displaces downwards for the certain percent, which is known as "an envelope factor." In some cases, they also depict the 3rd line, the central moving average from which there is a displacement. For instance, 2 % envelope of moving averages will look like two lines: the first moving average shifted on 2 % upwards, the second moving average shifted on 2 % downwards.
It is known that the envelope determines borders - both bottom and top ones - of normal movement of the prices of currency pair. There is a certain principle of using: after some changes, the price usually returns to the basic trend, which is central moving average. It is connected with that the more the price differs from the basic tendency, the more traders fix profit, returning the price in "a normal channel." There are more borders of strips to be chosen if the analyzed market is inconstant.
Envelopes' use several tools, such as:
- You should use strips' break as identifiers of development of shift. In some cases, Moving Average Envelopes are used as filters.
- You should use the top line as a resistance line, and bottom as a support line after careful selection of displacement's factor Tactics connected to it. Purchase at bottom and sale at the top line.
That is why when you purchase, for instance, when the price of currency at first has crossed moving average upwards, and then the top strip of an envelope. Do the opposite when you sale. When at first the price has crossed moving average from top downwards, and then the bottom strip of an envelope. Such behavior makes less the chances of getting false signals. However, if the present trends the right signal acts later, and the trader loses a part of trend shift, which is the same or more than an envelope's factor.
However, there are some lacks in this tool. For instance, Moving Average envelopes are late as well as any indicator built on the base of moving averages. Moving Average envelopes cannot be provided under ongoing inconstancy as, let's say, Bollinger Bands.
Important: you should first test their work for the demonstration account or testing as trading strategy and then use any indicators on real accounts. Even the most efficient indicator when used incorrectly, provides a number of false signals, and in the end during trade can cause great losses.