Moving Average Envelopes

Name Type Prerequisite Use Cases
Envelopes (ENV) Volatility SMA Mean reversion in stable, non-volatile instruments.

Definition

Moving Average Envelopes consist of a Moving Average and two outer bands (envelopes) set at a fixed percentage above and below the moving average. They help identify deviations from the trend and potential overbought/oversold conditions.

Mathematical Equation

  • Upper Envelope: \(SMA_{20} + (SMA_{20} \times k\%)\)

  • Lower Envelope: \(SMA_{20} - (SMA_{20} \times k\%)\)

  • Middle: \(SMA_{20}\)

Where \(k\) is a user-defined percentage (e.g., 2.5% or 5%).

Special cases

  • Maximum possible value: Unbounded
  • Minimum possible value: 0
  • Behavior: Follows the price, drawing bands at a set percentage above and below a moving average.

Visualization

Moving Average Envelopes

Trading Significance

  1. Trend Following: In a strong trend, price tends to stay between the MA and one of the envelopes.

  2. Reversion to Mean: When price touches or breaches the outer envelopes, it is often considered overextended and likely to revert towards the central moving average.