The technical indicator Envelopes is one of the simplest indicators when trading on Forex; it is included in the list of basic indicators on Forex trading platforms. This indicator for Forex is based on the observation that after rise or fall of the price, in any case it returns to the main trend.
«Envelopes» («envelope lines», Moving average envelopes) are built on two lines Moving Average that are equidistant from the moving average, which is required to apply additionally, if it is necessary. The moving averages mark the upper and lower limits of the dynamic corridor of price movements. If the price crosses the corridor, it is considered either too high or too low and is expected its return to the limits of the corridor. It is the task of the Envelopes indicator to identify the moment when the price begins to return to the trend.
The Envelopes indicator has a number of adjustable settings on the trading platforms. Among them are: the period, which determines the range of price values, on the basis of which the central moving average is calculated and the lines are built – the limits of the price corridor. The longer the period, the slower the indicator reacts to the price dynamics. The shorter the period is the faster the response, but the higher the number of false signals.
The next parameter is the width of the channel, which is determined by a deviation of the lines from the central moving average. It is considered that the deviation above 2% is excessive, because the indicator generates too many false signals. Such setting as an indicator shift shows a time shift of the Envelopes lines, and if the shift is set to a positive number, the shift is directed forward, if – to a negative number, the shift is directed backward. This setting should soften the delay of the signal, which is typical for indicators on moving averages.
The trader selects the indicator values in such a way that the price indicators are as accurate as possible, it means that the deviations from the price channel levels should not cause doubts. At the same time, price movements should stay within the price corridor as long as possible and exit it only during the actual trend change.
Sign in by broker’s terminal, add the Envelopes indicator to the chart, and see what happens
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The formula for calculation of plotting the Envelope price channel limits:
Upper limit line = SMA (or other moving average) (1+k/1000), where:
k is a deviation coefficient (k/1000).
Lower limit line = SMA (1-k/1000).
The benefit of the indicator is that it has no double meaning in interpretation. Another benefit of the indicator is an accurate determination of the flat movement and the moment when the flat movement is completed. It allows you to trade within the channel without excessive stress pressure. Also, the benefits of the indicator include its simplicity and the fact that it is easy to program, make on its basis an advisor for automate trading.
The drawbacks of the indicator are that it generates a lot of false signals during strong price movements and that its signals are still delayed, and the indicator does not differ in any particular efficiency.
Envelopes indicator in MetaTrader4
The package of moving averages is in the list of standard trend indicators in trading terminals MetaTrader4 and MetaTrader5. The indicator has preset settings of period, deviation, shift and type of the Simple lines (SMA). Traders work mainly with such parameters, but they can be changed. The settings are set depending on the currency pair and the period; which parameters will be correct, the trader determines empirically.
It is more convenient to work on the Envelopes indicator with the middle line which should be downloaded additionally. For instance, Adaptive Moving Average. The Envelopes indicator is more correct than other moving averages; it works with the ATR oscillator of true average range. On the other hand, the oscillator MACD helps to determine the beginning and end of the trend more accurately.
Envelopes indicator in brokers’ terminals
Forex brokers, such as AMarkets (website) and FinmaxFX (website) offer the trading through the terminals MetaTrader4 and MetaTrader5, which means there are the strategies with the Envelopes indicator available. In the trading terminal 24option (website), there is no Envelops in the set of indicators (fig. 1), but MetaTrader4 may be downloaded on the platform.
Also, there are no envelopes of moving averages in the list of indicators Olymp Trade (website), it is recommended to download MT4 for strategies with its use. There is no Envelopes indicator in the trading terminal Binomo (website), but the strategy with its use can still be implemented if the indicator is used on the chart of MT4 along with trading on the platform.
Envelopes indicator signals
The signals of the considered indicator are simple. For example, the indicator shows a signal about the possibility to make a trade when the price breaks the trading band. After the breakout, it is expected that the price will return to the channel, than you can open a trade. In fact, trades are opened after two breakouts of the channel.
The interpretation of the signal must take into account the direction of the channel. Accordingly, if the channel is moving up, the signals are expected from the lower line limiting the channel. If the channel moves down, the signals are tracked from the upper limit.
When the price reaches the upper limit, sell transactions are opened, when the price reaches the lower limit, buy transactions are opened. These signals are most clearly determined during the flat movement, but more effective are the transactions when a clear trend is formed. Envelops signals can be monitored without additional indicators and oscillators, but it is better to combine Envelopes with other indicators to confirm and clarify the signals.
Trading strategies based on Envelopes
The Envelopes strategies are not the most popular in Forex trading, as they do not differ particularly from other strategies based on moving averages. When using the indicator, you need to follow certain rules: price movements are analyzed at least on a half-hour timeframe, optimally from H1, since it is difficult to determine a false or true signal on less extended timeframes. But there are strategies that are implemented on shorter timeframes.
When working with the Envelopes indicator on the candlestick chart, it is recommended to open orders only after closing the candlestick indicating a reversal within the price channel. At the same time, almost all candles should be inside the price channel. If all the following candlesticks of the chart are closed above or below the crossed moving average, it means that the breakout turns into a trend.
There are three main trading strategies using the Envelopes indicator. When working with the indicator, the upper line is considered as a resistance level, the lower line — as a support level.
The first strategy is used for short-term transactions and is based on price movements within the price channel. The second strategy is based on the moments of breaking the limits of the price channel. With any strategy using the Envelopes indicator, the result will be with additional indicators. Another strategy is an impulse strategy, when a trader enters the trading on a strong price impulse, which is confirmed by the indicator. The trader waits for a break on the impulse and trades on it.
One of the strategies includes the combinations of Envelopes and Bollinger Bands. The «Bollinger Bands» strategy is integrated in trading terminals among the standard tools. The strategy is implemented on H1 timeframe, on the chart of Japanese candlesticks, on EUR/USD pair in MT5 terminal. You need to configure both indicators. Let us suppose that the parameters for Envelopes are: indicator period: 200, shift: 1 to closing prices, deviation: 0.15, line: Simple. Bollinger Bands parameters may be as follows: 20, shift: 0, deviation: 2, same with closing prices. As a result, the graph looks like this. You can also add to the chart any variant of the moving average for more accurate orientation within the limits of the channel.
The opening of the purchase transaction is assumed at the moment of crossing the upper line of the Envelopes indicator by bullish candlestick upwards. The candlestick shall close, the transaction is executed by next candlestick. The Bollinger Bands let us define the location of the stop-loss, which shall be set beyond the Bollinger indicator line.
The sell transaction shall be executed after crossing the bottom line of the Bollinger Bands indicator by the bullish candlestick downwards. The transaction shall be closed, when the candlestick is closing and the next candlestick formed confirming the trend. The stop-loss shall be set beyond the line of Bollinger Bands indicator. The strategy shall not be applied at the highly volatile market.
Another strategy is based on interaction of Envelopes with Stochastic (fig. 2), which allows you to determine the entry point. The oscillator confirms the breakdown of the trading band, which outlines the Envelopes indicator.
The Envelopes supported by Moving Average is used for scalping on the timeframe up to M30. On the Envelopes indicator, for example, the period of 50 with a deviation of 0.2 is set, the strategy is implemented at closing prices. The Moving Average indicator is set with a period 15. The entry points to the market will be the intersection of the moving averages of the Envelopes indicator (fig. 3).
The entry for a buy trade is determined by the intersection of the moving lines of the Envelopes indicator bottom up; the entry for a sell trade is determined by the intersection of the Envelopes indicator line that is moving from the top down.
The Envelopes technical indicator is one of the standard indicators of Forex trading terminals. It is an «envelope» of two lines that form a price corridor, all price movements occur within this corridor.
Traders expect when the indicator shows the approximation prices to the bounding lines and trade when the price returns to the limits of corridor. It is recommended to add other indicators and oscillators to the Envelopes indicator when trading; it can increase its efficiency.
On the basis of the indicator, a number of strategies have been created, which are based on the same principles, so these strategies do not differ in diversity. But they are quite simple to use. At the same time, when working with the Envelopes indicator, it is important to adjust the indicator properly, so that the incoming signals are not too rare or, on the other hand, there are not too many false signals. The effectiveness of the indicator should be confirmed by prior testing.