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Envelope
Description
An envelope is
comprised of two moving
averages. One
moving average is shifted upward and the second
moving average is shifted downward.
The envelope is plotted around a price plot
or indicator.
Interpretation
Envelopes
define the upper and lower boundaries of a
security's normal trading range.
A sell signal is generated when the
security reaches the upper band, whereas a buy
signal is generated at the lower band. The optimum
percentage shift depends on the volatility of the
security--the more volatile, the larger the
percentage.
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. |
