Envelopes

Envelopes are technical indicators that are plotted over upper and lower bounds. Each line is a moving average, However, one is shifted upwards while the other is shifted downwards. Envelopes technical indicator can help you to identify overbought and oversold conditions. When price reaches the upper band, it’s considered overbought and at that point, the market will react by selling

If the price reaches the lower bound, the price is considered oversold. This means that a buy signal will be generated. Many traders also use Envelopes to identify trading ranges. When the price reaches or crosses the upper band, this is usually regarded as a sell signal. If price crosses or reaches the lower band of the channel that formed by the envelope, it’s considered a sell signal. During regular market conditions, the price will stay within the channel formed by the upper and lower bounds.

Calculating Envelopes Technical Indicator

In the calculations below, the following symbols are used:

1. K/1000 = the shift from the average, in basis points
2. N = the number of periods
3. SMA = Simple Moving Average