What is an Envelope: A measure of the volatility of price movement, envelopes are simply two lines typically plotted a certain percentage away (one above and one below) from a moving average. Their primary purpose is to measure the deviation of price away from its mean average over a given past period of time.
Category: Technical analysis indicator
How are Envelopes Used: Envelopes are used for a specific trading purpose. Trade entries and exits can be determined through the use of the outer lines. Often, traders will trade against a prevailing price move using a “reversion to the mean” strategy once price reaches out to one of the outer lines. The assumption is that price has traded too far away from its recent average, and should correct back.
What Do Envelopes Consist of: Envelopes are typically overlaid directly on top of a price chart. The outer lines show boundaries a certain percentage away from a central moving average. There are generally three lines displayed, with the two outer lines representing support and resistance within the underlying trend.
What Do Envelopes Look Like:
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