Envelopes are one of the forex technical analysis tools that are used by technical traders. We can churn out lots of profits from using this indicator properly. They are basically Moving Average Envelopes and consist of 2 moving averages calculated as simple, exponential et al, one placed upward and the other downward. Sometimes we see a third line, the central moving average from which there is a twist – this is the base of the Envelopes. The Envelopes define the upper and lower price range margins. The choice of the best relative number of band margin shifting is determined by the market volatility.

It is an established fact that the envelopes determine boundaries – the upper and lower boundaries – depicting prices of currency pairs in real time action. When using this indicator you should know that the price basically turns back to its normal trend after some alterations – this is the moving average. The Envelopes are such that the more we see price differential from the normal trend, the more investors fix profits, and this brings price in it normal channel.

The upper and lower Envelopes have its lines drawn above and below moving average technical indicator such that their distance apart equals fixed % of this moving average.

Interpretations and Possible alert Patterns of the Envelopes Indicator When trying to interpret the Envelopes, they work similar to the Bollinger Bands and as such within the normal trading range of a currency pair or other financial instrument they are able to define the trading boundaries in between upper and lower limits.

Some possible trading patterns that should be observed include: - During trending market it is advisable to take only alerts from price Envelopes in the major direction of the trend. For instance if our major trend is bullish, we’ll only accept an oversold alert from price Envelopes. On the other hand, if it’s down, we’ll only consider an overbought price Envelopes. - For a ranging market the alerts from a price Envelopes are bearish when the currency pair or any other instrument touches the upper band and a buy alert when it touches the lower band.

The study of the workings of the Envelopes is a derivative of the Moving Average study. Although the moving average lines are not visible the price bands on the Envelopes are equal percentage distance from our simple moving average. If you add a simple moving average to you chart alongside the Envelopes it would be so evident their equidistance property.

Although, we have quite a number of trading rules out there, the simplest remains using the price band as an entry/exit point. If price cuts the upper band a long position should be taken. If you hold a short position at this time, I’ll advice that close it and go bullish. The opposite applies if price cut across the lower band.