Envelopes
Envelopes Technical Indicator is formed with two Moving Averages one of which is
shifted upward and another one is shifted downward. The selection of optimum
relative number of band margins shifting is determined with the market volatility: the
higher the latter is, the stronger the shift is.
Envelopes define the upper and the lower margins of the price range. Signal to sell
appears when the price reaches the upper margin of the band; signal to buy appears
when the price reaches the lower margin.
The logic behind envelopes is that overzealous buyers and sellers push the price to the
extremes (i.e., the upper and lower bands), at which point the prices often stabilize by
moving to more realistic levels. This is similar to the interpretation of Bollinger
Bands.
Calculation
Upper Band = SMA(CLOSE, N)*[1+K/1000]
Lower Band = SMA(CLOSE, N)*[1-K/1000]
Where:
SMA — Simple Moving Average;
N — averaging period;
K/1000 — the value of shifting from the average (measured in basis points).