Envelopes
Type
Trend follower
Short introduction
Like Bollinger Bands, envelopes are based on a moving average - although their calculation is somewhat simpler. The common abbreviation is ENV.
Statement
The statement for envelopes is similar to that for Bollinger Bands (see there). A GD is calculated, on the basis of which two (upper and lower) bands are calculated. The distance of the bands from the GD is usually identical. The majority of the prices are captured in an envelope.
Formula/calculation
Calculation of a GD, then:
upper band =MAx + (MAx * percentage / 100)
lower band =MAx - (MAx * percentage / 100)
or also:
upper band =MAx + fixed amount
lower band =MAx - fixed amount
Interpretation
Envelopes offer several possibilities for interpretation. The standard interpretation corresponds to that described for the Bollinger Bands. As the envelopes are based on GDs, all the options offered there for defining the basic GD are available. It is also possible to use absolute values in addition to the usual percentage deviation upwards and downwards. This can also lead to interesting results.
Default setting
Basic GD: 20 days
Deviation: no standard, as it depends on the underlying; it makes sense to take the volatility of the underlying into account.
Basic trading systems
- Envelopes
The default setting for the "Envelopes" base trading system is a time period of 20, the method is set to linear and the distance of the lines from the GD is set to +1.5 % or -1.5 %. The base trading system provides buy signals when the close breaks through the upper band from bottom to top, and sell signals when the close breaks through the lower band from top to bottom.