{"id":9586,"date":"2022-10-12T08:03:34","date_gmt":"2022-10-12T08:03:34","guid":{"rendered":"https:\/\/mdr.foobrdigital.com\/?p=9586"},"modified":"2022-10-12T08:03:34","modified_gmt":"2022-10-12T08:03:34","slug":"how-to-use-moving-average-envelopes","status":"publish","type":"post","link":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/2022\/10\/12\/how-to-use-moving-average-envelopes\/","title":{"rendered":"How to Use Moving Average Envelopes"},"content":{"rendered":"\n<p>What are&nbsp;<strong>moving average envelopes?<\/strong><\/p>\n\n\n\n<p>Let\u2019s rewind and briefly talk about moving averages first.<\/p>\n\n\n\n<p>The goal of using moving averages is to&nbsp;<strong>identify trend changes.<\/strong><\/p>\n\n\n\n<p>While moving averages are a useful tool to have in your technical analysis toolbox, they can be susceptible to&nbsp;<strong>providing false signals.<\/strong><\/p>\n\n\n\n<p>Like you\u2019ve learned in previous lessons on moving averages, a simple buy signal occurs when&nbsp;<strong>prices close&nbsp;<em>above<\/em>&nbsp;the moving average<\/strong>.<\/p>\n\n\n\n<p>And a simple sell signal occurs when the<strong>&nbsp;price closes&nbsp;<em>below<\/em>&nbsp;the moving average<\/strong>.<\/p>\n\n\n\n<p>For example, let\u2019s say EUR\/USD is moving upward and closes above a\u00a0moving average, signaling an entry to go long.<\/p>\n\n\n\n<p>How do you know that this bullish trend is \u201creal\u201d and will continue?<\/p>\n\n\n\n<p>You don\u2019t.<\/p>\n\n\n\n<p>So assuming you still want to go long, you have two options:<\/p>\n\n\n\n<ol><li>Go long now based on the original entry signal (price closed above MA)<\/li><li>Wait for more&nbsp;<strong>confirmation<\/strong>&nbsp;that the trend is legit.<\/li><\/ol>\n\n\n\n<p>This is where&nbsp;<strong>moving averages envelopes<\/strong>&nbsp;(MAE) can help.<\/p>\n\n\n\n<p>Huh? Moving average&nbsp;<em>envelopes<\/em>?<\/p>\n\n\n\n<p>Like this?<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/bpcdn.co\/images\/2020\/04\/03172935\/funny-moving-average-envelope-360x293.png\" alt=\"Moving Average Envelope? Like This?\" class=\"wp-image-173242\"\/><\/figure>\n\n\n\n<p>No, not that kind of&nbsp;<em>envelopes<\/em>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What are Moving Average Envelopes?<\/h2>\n\n\n\n<p>A moving average envelope consists of a&nbsp;<strong>moving average AND two other lines<\/strong>.<\/p>\n\n\n\n<p>One line is ABOVE the moving average and the other line is BELOW the moving average.<\/p>\n\n\n\n<p><strong>Together, these two lines form an upper and lower envelope.<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image\"><a href=\"https:\/\/bpcdn.co\/images\/2020\/04\/04172329\/moving-average-envelope-example.png\"><img decoding=\"async\" src=\"https:\/\/bpcdn.co\/images\/2020\/04\/04172329\/moving-average-envelope-example-780x333.png\" alt=\"Moving Average Envelopes Example\" class=\"wp-image-173307\"\/><\/a><\/figure>\n\n\n\n<p>It\u2019s called an envelope (noun) because these two lines&nbsp;<em>envelope<\/em>&nbsp;(verb) the original moving average line.<\/p>\n\n\n\n<p>Moving averages envelopes are used to:<\/p>\n\n\n\n<ul><li>Confirm&nbsp;<strong>trend<\/strong><\/li><li>Identify&nbsp;<strong>overbought and oversold conditions<\/strong><\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">How to Calculate Moving Average Envelopes<\/h2>\n\n\n\n<p>How to calculate a moving average envelope is pretty simple.<\/p>\n\n\n\n<p>First, decide whether you want to use a\u00a0<strong>simple moving average\u00a0(SMA)<\/strong>\u00a0or\u00a0<strong>exponential moving average\u00a0(EMA)<\/strong>.<\/p>\n\n\n\n<p>Remember,\u00a0EMAs\u00a0have less lag because they put more weight on recent prices.<\/p>\n\n\n\n<p>Then, select the number of time periods you wish to apply.<\/p>\n\n\n\n<p>Lastly, set the percentage value you\u2019d like to use for the envelopes.<\/p>\n\n\n\n<p>For example, a 10-day moving average with a 1% envelope would show the following lines:<\/p>\n\n\n\n<pre class=\"wp-block-preformatted\"><strong>Upper Envelope:<\/strong> 10-day SMA + (10-day SMA x .01)\n<strong>10-day SMA<\/strong>\n<strong>Lower Envelope:<\/strong> 10-day SMA - (10-day SMA x .01)<\/pre>\n\n\n\n<p>The chart below shows EUR\/USD with a&nbsp;<strong>10-day SMA and 1% envelopes<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><a href=\"https:\/\/bpcdn.co\/images\/2020\/04\/04173826\/moving-average-envelopes-EURUSD.png\"><img decoding=\"async\" src=\"https:\/\/bpcdn.co\/images\/2020\/04\/04173826\/moving-average-envelopes-EURUSD-780x401.png\" alt=\"EURUSD with Moving Average Envelopes\" class=\"wp-image-173311\"\/><\/a><\/figure>\n\n\n\n<p>Notice how the envelopes (blue lines) move parallel with the 10-day SMA (orange line).<\/p>\n\n\n\n<p>They remain a&nbsp;<strong>constant<\/strong>&nbsp;1% above and below the moving average (orange line).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How to Confirm Trend Direction with Moving Average Envelopes<\/h2>\n\n\n\n<p>Since the foundation of moving average envelopes (MAE) is the moving average, this means that the moving average envelopes can be used as a trend-following indicator.<\/p>\n\n\n\n<p><strong>The direction of the&nbsp;<em>moving averag<\/em>e determines the direction of the&nbsp;<em>envelopes<\/em>.<\/strong><\/p>\n\n\n\n<p>When the envelopes are moving higher, the price is in an&nbsp;<strong>uptrend<\/strong>.<\/p>\n\n\n\n<p>When the envelopes are moving lower, the price is in a&nbsp;<strong>downtrend<\/strong>.<\/p>\n\n\n\n<p>When the envelopes are moving sideways, the price is neither in an uptrend or downtrend. The trend is neutral and the price is considered directionless.<\/p>\n\n\n\n<p>You should pay attention&nbsp;<strong>when the price moves above or below the envelopes<\/strong>.<\/p>\n\n\n\n<p>Since trends often begin with a strong move, if the price surges above the upper envelope, this is considered&nbsp;<strong>bullish<\/strong>.<\/p>\n\n\n\n<p>If the price plunges below the lower envelope, this is considered&nbsp;<strong>bearish<\/strong>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Buy Signal<\/h3>\n\n\n\n<p>If the price closes&nbsp;<em>above<\/em>&nbsp;the UPPER envelope,&nbsp;<strong>buy<\/strong>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Sell Signal<\/h3>\n\n\n\n<p>If the price closes&nbsp;<em>below<\/em>&nbsp;the LOWER envelope,&nbsp;<strong>sell<\/strong>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Example: GBP\/USD<\/h3>\n\n\n\n<p>In the chart below, notice how the 20-day simple moving average (orange line) and the upper and lower envelopes (blue lines) are moving higher.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/bpcdn.co\/images\/2020\/04\/04182540\/moving-average-envelopes-GBPUSD-780x401.png\" alt=\"Moving Average Envelope Example GBPUSD\" class=\"wp-image-173314\"\/><\/figure>\n\n\n\n<p>See how the price managed to close above the moving average?<\/p>\n\n\n\n<p>To confirm that the trend has changed from bearish to bullish, you could wait until the price has also closed above the upper envelope.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How to Identify Overbought and Oversold Levels with Moving Average Envelopes<\/h2>\n\n\n\n<p>There will also be times when the price initially moves above or below an envelope but turns back around.<\/p>\n\n\n\n<p>This usually happens when the moving average slope is FLAT.<\/p>\n\n\n\n<p>When this happens, moving average envelopes can be used to identify overbought and oversold levels.<\/p>\n\n\n\n<p>When the price moves above the upper envelope, this can be considered&nbsp;<strong>overbought<\/strong>.<\/p>\n\n\n\n<p>When the price moves below the lower envelope, this can be considered&nbsp;<strong>oversold<\/strong>.<\/p>\n\n\n\n<p>Identifying overbought and oversold levels isn\u2019t easy though.<\/p>\n\n\n\n<p>Remember, a\u00a0currency pair\u00a0can become overbought and\u00a0<em>remain<\/em>\u00a0overbought when the bullish trend is strong.<\/p>\n\n\n\n<p>The same goes for being oversold. In a strong bearish trend, something can be technically oversold, but&nbsp;<em>remain<\/em>&nbsp;oversold for quite some time.<\/p>\n\n\n\n<p>This is why it\u2019s best to pay attention to the&nbsp;<strong>slope of the moving average<\/strong>&nbsp;and make sure it\u2019s&nbsp;<strong>flat<\/strong>.<\/p>\n\n\n\n<p>You should confirm overbought and oversold levels with support and resistance levels.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Buy Signal<\/h3>\n\n\n\n<p>If price touches or falls beneath the LOWER envelope, then rises back above,&nbsp;<strong>buy<\/strong>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Sell Signal<\/h3>\n\n\n\n<p>If price touches or rises above the UPPER envelope, then falls back below,&nbsp;<strong>sell<\/strong>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Example: EUR\/JPY<\/h3>\n\n\n\n<p>In the chart below, notice how the 30 SMA&nbsp; (orange line) and the upper and lower envelopes (blue lines) are flat\u2026almost horizontal even.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/bpcdn.co\/images\/2020\/04\/04184220\/moving-average-envelopes-as-support-resistance-EURJPY-780x401.png\" alt=\"Moving Average Envelope as Support and Resistance\" class=\"wp-image-173318\"\/><\/figure>\n\n\n\n<p>EUR\/JPY is directionless here. There is no strong bullish trend, nor is there a strong bearish trend.<\/p>\n\n\n\n<p>Observe how the upper envelope acts as a strong resistance level.<\/p>\n\n\n\n<p>Whenever price traded near the upper envelope, the price would fall back down.<\/p>\n\n\n\n<p>The same with the lower envelope. Observe how it acts as a strong support level.<\/p>\n\n\n\n<p>Whenever price traded near the lower envelope, the price would bounce back up.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Summary<\/h2>\n\n\n\n<p>Moving average envelopes (MAE) are used as a tool to&nbsp;<strong>confirm trend direction<\/strong>, but can also be used in sideways markets to&nbsp;<strong>identify overbought and oversold levels<\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What are&nbsp;moving average envelopes? Let\u2019s rewind and briefly talk about moving averages first. The goal of using moving averages is to&nbsp;identify trend changes. While moving averages are a useful tool to have in your technical analysis toolbox, they can be susceptible to&nbsp;providing false signals. Like you\u2019ve learned in previous lessons on moving averages, a simple [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[869],"tags":[],"_links":{"self":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/9586"}],"collection":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/comments?post=9586"}],"version-history":[{"count":0,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/9586\/revisions"}],"wp:attachment":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/media?parent=9586"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/categories?post=9586"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/tags?post=9586"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}