MA Envelope

Moving Average Envelope

- Technical Analysis, Indicators

Technical Analysis

Technical Analysis, Studies, Indicators:

Moving Average Envelopes

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Description: technical indicators, analysis, moving average, technical studies, moving average envelope, price MA, technical analysis, indicators on charts

A moving average (MA) can be enhanced by two parallel moving averages that are shifted by user-specified values from the main moving average. Shifted parallel moving averages are called Envelopes. As an examples, 2% Envelopes represents two moving average that are shifted upwards by 2% and downward by 2% from the main moving average.

In technical analysis Envelopes are used to see whether the price moves inside envelopes (within a deviation specified by the user from the MA) or it swings out of envelopes.

As a rule, moving averages are used to define trend patterns and generate signals. Simple trading systems that are based on a moving average would tell you to buy when the price rises above the moving average and to sell when the price drops below the moving average. While this system would spot strong and prolonged (in time) trends, this system would generate number of fake signals in choppy volatile markets. To reduce the number of fake signals, MA Envelopes could be used. Adding Envelopes to the simple system that is described above would change the system's rules into buying when the price rises above the upper Envelope and selling when the price drops below the lower Envelope. In this way, MA Envelopes help to filter out fake signals. However, at the same time, Envelopes reduce the profit to be gained from wining signals.

Chart 1: S&P 500 index (^SPX) - MA Envelopes

S&P 500 - Technical Analysis - moving Average Envelopes

V. K.

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