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Main Dictionary E

Envelope

Term envelope refers to technical indicator based on trailing average. It is a channel of two or three lines is built on the chart, inside of which the price chart is located.

Envelope usage explained

The envelope indicator is adjusted for each instrument and for each time frame individually. The deviation coefficient is carefully chosen so that the upper line of the envelope serves as resistance and the lower line of the envelope as support. It is crucial to choose the right method of moving average, in which lines will most clearly reflect the price movements.

Traders explain envelopes individually. However, envelopes are mostly used for trading ranges evaluation. Sell signal of the envelop eusually occurs when the price tends to near the upper, or resistance, level. In this case, the stock is considered overbought and its rate might soon decrease. Alternatively, the share cost might show fall and tendency to approach the support line of the envelope, it is time to purchase the shares. This technique is found on the average reversion concept.

The resistance and support levels of the envelope are chosen in order to keep the stock price between upper and lower levels. Volatile securities with bigger price changes expect a higher percentage range in the envelope as they might give false signals of purchase or sell time to the trader who uses the envelope. Less volatile securities with lower cost changes require upper and lower levels of the envelope much closer to the price line. With the help of this method it is convenient to estimate stock-price movements.

Envelopes are usually used in combination with other technical analysis principles to increase the chances of success deal. For example, traders can identify potential sell or purchase opportunities when the price goes beyond the envelope, and other indicators assist in determining when the tipping point will come. 

Envelopes are used to trade securities for various periods of time. For example, traders can use envelopes for long-term or short-term dealing.

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