Trading according to the market technique is extremely exciting and actually not very complicated if you are familiar with the patterns of the prices and the signals of the indicators. The difficult thing about trading is implementing the strict rules. Once you have found your preferred patterns and indicators, it is an advantage to develop strict rules that allow you to trade the tools provided.
In this article, we present an indicator that is similar to the Bollinger bands and is based on the same principle. Like the Bollinger bands, the envelopes are two bands that cover the course. The idea behind it is as follows: It is assumed that prices fluctuate around an average and therefore always return to it. The upper and lower bands form resistance and support zones and envelop the course.
Calculating the envelopes
To calculate the envelopes, you first need an average. This is represented by a moving average. Here the trader can choose a period that suits him; The standard would probably be 14. The method of smoothing (simple or exponential) the moving average must also be chosen by the trader according to his preferences.
Using a factor, a shift to the moving average is now calculated, which results in the band, This factor can be either variable or fixed. If a variable value is selected, a relative value for the deviation is usually given. With a fixed value, traders can also specify the number of points or pips of the traded value. As a rule, 2-4 percent is usual for the percentage shift.
Interpretation of the envelopes
The interpretation of the envelopes is as simple as that of the Bollinger bands. As a rule, it is about recognizing reversal patterns or defining the point in time when a countermovement can start. Two definitions have been established:
- The bands are seen as resistance and support for trading within the bands.
- Breakouts from the bands can, on the one hand, mean that the price is overstimulated ; second, that the trend is gaining momentum.
If the price remains within the bands for a longer period of time, the probability that the range will continue is increased. Trading within the range can then take place without any problems, as the upper chart shows. A distinction has to be made for the second definition.
On the one hand, a breakthrough through one of the bands indicates an overexcitation, so that a strong countermovement can be expected. In the second case, a breakthrough can be seen as trend-confirming. In this case, you have to use other indicators or technical setups that indicate this trend.
If we take a closer look at the upper chart, we see that the first strong breakthrough is through the upper band indicates a continuation of the trend, although there was a short-term countermovement. However, you do not necessarily need other indicators for this, but can identify common patterns in the course. The breakthrough through the band also followed a breakthrough of the upward funnel channel (trend pattern).
In the second case, we also have a technical pattern that indicates the continuation of the newly established trend, namely the top formation in the form of a Highs and a lower high. The later breakthrough through the lower band can therefore be interpreted as making a sustainable countermovement unlikely. Should it still occur, it will be relevant to see whether the price moves back into the bands. In this case, one can assume a longer countermovement to the now upper or blue band.
How to use Envelopes on MT4 - Forex and Binary Options Trading
Conclusion - Envelopes as simple and effective tools
The technical indicator Envelopes is a simple, but effective indicator. In summary, it can be useful for two strategies, namely the continuous trend trading within the bands or the exploitation of breakouts. In the meantime, for outbreaks, it should be noted that the indicator initially indicates a dynamic countermovement, since the price is overstimulated - unless a technical setup or another indicator indicates that the trend is continuing.
With The broker BDSwiss is particularly well suited to trading with such simple techniques.
Here you will find information on the
- DeMarker indicator
- short-term trading with DeMarker indicator
- Indicators as trading systems.