Let’s rewind and briefly talk about moving averages first.

The goal of using moving averages is to identify trend changes.

While moving averages are a useful tool to have in your technical analysis toolbox, they can be susceptible to providing false signals.

As you’ve learned in previous lessons on moving averages, a simple buy signal occurs when prices close above the moving average.

And a simple sell signal occurs when the price closes below the moving average.

Moving Average Envelope Example

For example, let’s say EUR/USD is moving upward and closes above a moving average, signaling an entry to go long.

How do you know that this bullish trend is “real” and will continue?

You don’t.

So assuming you still want to go long, you have two options:

  1. Go long now based on the original entry signal (price closed above MA)
  2. Wait for more confirmation that the trend is legit.

This is where moving average envelopes (MAE) can help.

We’ll look at it more in the next section.