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Envelope

An envelope is comprised of two moving averages (see Moving Average). One moving average is shifted upward and the second moving average is shifted downward. The Envelope is plotted around a price plot or indicator. Envelopes define the upper and lower boundaries of a securitys normal trading range. A sell signal is generated when the security reaches the upper band whereas a buy signal is generated at the lower band. The optimum percentage shift depends on the volatility of the securitythe more volatile, the larger the percentage. The logic behind envelopes is that overzealous buyers and sellers push the price to the extremes (i.e., the upper and lower bands), at which point the prices often stabilize by moving to more realistic levels. This is similar to the interpretation of Bollinger Bands.

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