Updated on March 9, 2023
The Envelope in technical analysis is a trend-following indicator that consists of two lines plotted around a moving average. The upper line is typically plotted a certain percentage above the moving average, while the lower line is plotted a certain percentage below the moving average. The Envelope is used to identify changes in market trends and to indicate overbought or oversold conditions.
How to use envelope indicator?
The idea behind the Envelope is that prices tend to fluctuate within a certain range and that prices that move outside of that range are likely to revert back to the average. If the price of a security breaks above the upper line, it may indicate that the security is overbought and that a correction is likely. Conversely, if the price of a security breaks below the lower line, it may indicate that the security is oversold and that a rebound is likely.
The Envelope can be used in a variety of ways, including to generate buy and sell signals, to determine the strength of a trend, and to identify potential trend reversals. It’s important to note that the Envelope is a trend-following indicator, and it may not be the best tool for identifying short-term market movements.