This tutorial discusses Introduction To Moving Average Envelopes, Formula Of Moving Average Envelopes, Sample Chart Using Moving Average Envelopes, Description Of Moving Average Envelopes, How To Use Moving Average Envelopes, Disadvantages Of Moving Average Envelopes.
The simplest moving averages can be transformed into a new tool - envelopes of moving averages. This tool, like the Bollinger Bands, is used to determine the boundaries of the current price movement.
The indicator consists of three bands:
The upper band of the envelope: Moving Average Upper Band = Moving Average + (K / 100) x Moving Average
Where K is the percentage of the price at which the sliding moves upwards
Lower band of the envelope: Moving Average Lower Band = Moving Average - (N / 100) x Moving Average Where N is the percentage by which the moving average moves down.
The envelopes moving averages (Moving Average Envelopes) consist of two moving average (which may be considered as a simple exponential or on a different principle), displaced one up and the other down by a percentage (called envelope coefficient).
Sometimes we draw the third line - the central sliding from which there is a shift.
For example, a 2% envelope of moving averages will look like 2 lines, the first one - sliding shifted by 2% up, the second - 2% down. It is believed that the envelope defines the boundaries (upper and lower) of the normal price fluctuation of the currency pair.
The principle of using the moving average bands is as follows: the price always returns after some fluctuations to its main trend (to its central moving average). This is due to the fact that the more the price differs from its main trend, the more traders fix the profit, returning the price to the "normal channel".
The greater the volatility of the analyzed market, the more the boundaries of the bands need to be selected.
There are a number of methods for using envelopes:
Like any indicator built on the basis of moving averages, envelopes of moving averages are late. Slip envelopes are not able to adjust to the current volatility of the market, such as the Bollinger Bands.
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