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The Envelopes Indicator
The envelopes indicator is a technical analysis tool that is used to identify trend changes in financial markets. It is based on the idea that prices tend to move within two outer bands that are placed above and below a moving average. The distance between these bands is determined by the volatility of the market, with the bands expanding when the market is more volatile and contracting when the market is less volatile.
To use the envelopes indicator, a trader will typically set the moving average to a period of time that is appropriate for the market being analyzed, such as 10, 20, or 50 periods. The outer bands are then plotted a certain percentage above and below the moving average, with the percentage usually being set between 5% and 20%.
How The Envelopes indicator works
The indicator can be interpreted in many different ways, the most common interpretation are;
Firstly, when an asset’s price reaches the upper bound, the asset is considered overbought, and suggests a sell signal. Conversely, when the price reaches the lower bound, the security is considered oversold, and a buy signal is generated.
Also, when the market is range-bound, the moves of the price above the upper Envelopes band signal that the asset is overbought and will likely reverse down. Moves below the lower band mean that the market is oversold and may reverse up.
Lastly, when the price of the asset being analyzed breaks above the upper band, it is considered to be a bullish signal, indicating that the trend may be shifting upwards. Conversely, when the price breaks below the lower band, it is considered to be a bearish signal, indicating that the trend may be shifting downwards. Some traders may use the envelopes indicator in conjunction with other technical indicators or chart patterns to confirm trend changes and make trading decisions.
