Moving Average Envelopes

Moving average envelopes, also known as price envelops, percentage envelops, trading bands and moving average bands, are moving average bands used for different trading purposes. They are lines running above and below the moving average creating a trading band and can be used 1) as support and resistance levels, 2) for identifying overbought and oversold conditions and 3) to generate buy and sell signals.



Moving average envelopes are simple yet effective trading tools. The upper and lower envelope lines are calculated from the moving average for a period; ideal is 35 to 45 days, but can be short (for short-term traders) or long (for long-term traders). The formulae are,

Upper Band (UB) = MA + (MA x N/100)

Lower Band (LB) = MA – (MA x N/100)

Where MA is the moving average for the period
N is the percentage figure to plot upper and lower bands.

The percentage figure should correspond to the objective of using the moving average envelopes. Most traders use a value around 5%; percentages from 2 to 6 are also common. In general the percentage value should be determined with respect to the period of moving average, volatility of trading instrument and previous ups and lows.

When used for indicating support and resistance levels, upper band is taken as resistance and lower band is taken as support. When used for generating signals (usually small percentage figures) crossing of lower band from below generates buy signals and crossing upper band from above generates sell signals. Many traders also use the central moving average (actual moving average) and crossing of this line is used to generate buy and sell signals.

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