Moving average envelopes are created by placing two additional lines or "bands" around a core moving average, which is typically a simple moving average (SMA). These bands are set at a specific percentage above and below it. For example, if the core moving average is a 50-day SMA and the envelopes are set at 5%, the upper band will be 5% above the moving average, and the lower band will be 5% below it.
The core moving average constantly adjusts to new price data, also shifting the bands. This allows the moving average envelopes to reflect market conditions dynamically. Price increases shift the bands upwards, and price decreases shift the bands downwards.
Moving average envelopes can help traders analyze market trends. By observing whether the price remains within the envelopes or consistently touches one of the bands, traders can assess whether a market is trending upward, downward, or sideways.
In addition, moving average envelopes may be used to determine potential overbought and oversold market conditions. A price cross above the upper envelope indicates an overbought market condition, suggesting a potential sell signal. Conversely, a price drop below the lower envelope could signal an oversold market condition, indicating a potential buying opportunity.
Moving average envelopes are technical indicators that consist of two bands set at a fixed percentage above and below a central moving average. Traders can use the moving average envelopes to determine market volatility, overbought and oversold market conditions, shifts in market trends, and more.