Envelopes

What

Envelopes Technical Indicator is formed with two Moving Averages one of which is shifted upward and another one is shifted downward. The selection of optimum relative number of band margins shifting is determined with the market volatility: the higher the latter is, the stronger the shift is.

How

Upper Band = SMA (CLOSE, N)*[1+K/1000]

Lower Band = SMA (CLOSE, N)*[1-K/1000]

Where:

SMA — Simple Moving Average;

N — averaging period;

K/1000 — the value of shifting from the average (measured in basis points).

When

These trading bands are used by technical analysts to define a stock's upper and lower boundaries. Signals to sell occur when the stock price reaches the upper band, and buy signals are generated when the price reaches the lower band.

The reasoning behind the sell and buy signals is that stock prices tend to bounce off the bands. Even though buyers and sellers will temporarily pressure a stock's price to its extremes, it should re-stabilize to more realistic levels found within the envelope.