Moving Average Envelopes (Env)

Moving Average Envelopes draw two lines a fixed percentage above and below a moving average, over the candles. Unlike Bollinger Bands or Keltner Channels, the width does not follow volatility: it follows the price level, and you choose it. The lines are in price units.

What it shows#

• Basis — the 20-bar simple moving average of the source; its slope is the trend.
• Upper — the basis plus 10 percent of itself. The price above it is far from its average.
• Lower — the basis minus 10 percent of itself.
• Band fill — the tint between the two lines.

How it is calculated#

The basis is the simple or exponential average of the Source over Length bars, as set by Average. The upper line is the basis multiplied by (1 + Percent / 100) and the lower line the basis multiplied by (1 − Percent / 100). The first value appears after Length bars for the simple average; the exponential one needs a longer warm-up.

How traders use it#

• Over-extension: the price outside the envelope is far from its average and often comes back to it, so the lines mark where to look for a swing back, with the basis as the target.
• Trend: to a trend trader the same close outside the envelope is strength. The two readings are separated by the trend on a higher timeframe, not by the envelope.
• Trend filter: trading only in the direction of the basis slope keeps you out of counter-trend trades.
• The percentage is the whole indicator. The default of 10 percent is the common chart setting for daily and longer charts; on gold's daily chart it puts the lines about $430 from the average, which the price seldom reaches. A few percent on daily bars and a fraction of a percent on intraday bars bring them into play; set it by how far past swings went from the average.
• Watch out: a fixed percentage does not know that the market has turned wild or quiet, so an envelope tuned in a calm month is too tight in a volatile one, and the average lags like any other.

Settings#

Example on gold#

For example, you set Percent to 2 on the daily chart while gold's 20-day average is $4,300, so the lines sit at $4,214 and $4,386. A fast rally then takes gold to $4,390, through the upper line, in three days. A mean-reversion trader reads that as stretched and waits for the first close back inside the envelope to sell towards the basis, with the stop above the rally high. A trend trader reads the same close as strength and would rather buy a pullback to the basis.

The envelope does not choose between them; the weekly trend does. A close that stays outside for days while the basis turns up tells the mean-reversion trader to stand aside. This is an illustration, not a signal.

Add it to your chart#

1. Click Indicators in the top strip (on the Pro screen, press I).
2. Type envelopes and click Moving Average Envelopes, or press Enter for the first result.
3. Click its chip in the legend to open the Inspector and change the settings; drag the chip to reorder; the dot hides it; × removes it.

Related#

• Bollinger Bands — bands whose width follows volatility instead of a fixed percentage
• Keltner Channels — bands an ATR multiple from an exponential average
• Simple Moving Average — the basis on its own
• Exponential Moving Average — the other choice of basis
• Alerts — an alert when the price crosses a line of the envelope
• Adding and tuning indicators