A moving average envelope consists of a moving average AND two other lines.
One line is ABOVE the moving average and the other line is BELOW the moving average.
Together, these two lines form an upper and lower envelope.
It’s called an envelope (noun) because these two lines envelope (verb) the original moving average line.
Moving averages envelopes are used to:
How to calculate a moving average envelope is pretty simple.
First, decide whether you want to use a simple moving average (SMA) or an exponential moving average (EMA).
Remember, EMAs have less lag because they put more weight on recent prices.
Then, select the number of time periods you wish to apply.
Lastly, set the percentage value you’d like to use for the envelopes.
For example, a 10-day moving average with a 1% envelope would show the following lines:
Upper Envelope: 10-day SMA + (10-day SMA x .01) 10-day SMA Lower Envelope: 10-day SMA - (10-day SMA x .01)
The chart below shows EUR/USD with a 10-day SMA and 1% envelopes.
Notice how the envelopes (blue lines) move parallel with the 10-day SMA (orange line).
They remain a constant 1% above and below the moving average (orange line).
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