Price envelopes consist of 2 moving averages and are plotted at a set percentage above and below a 3rd moving average. Price envelopes can be used to indicate overbought and oversold levels. Overbought conditions are found at the upper band and oversold conditions at the lower band.
Price envelopes consist of three moving averages:
a middle band being a N-period simple moving average or exponential moving average (SMA or EMA)
an upper moving average (SMA or EMA - upper band) plotted at a set percentage above the middle band
a lower moving average (SMA or EMA -lower band) plotted at a set percentage below the middle band
The Percentage should be set so that about 85% of currency price activity is contained within the upper and lower bands. If currency price volatility increases/decreases, than adjust the bands %.
Interpretation
The interpretation is similar to Bollinger Bands, Price Envelopes define the upper and lower boundaries of a currency pair's (or other instrument) normal trading range.
Popular Trading Signals from Price Envelopes I. In trending markets
Take only signals from Price Envelopes in the main direction of the trend. If the main trend is up, take only oversold signals from Price Envelopes. Conversely, if the main trend is down, take only overbought signals from Price Envelopes.
II. In ranging markets
A sell signal is generated when the currency pair reaches the upper band, similarly a buy signal is generated at the lower band. (see chart example below).
Please remember that Price envelopes, as with all other technical indicators should not be used by themselves but should be combined with other indicators / studies to make a complete forex trading system.
