Envelopes Indicator
The Envelopes indicator is a free technical analysis tool that traders can use for their advantage. The tool helps to identify the trends and potential reversals of the trends. The indicator is based on moving averages and it works quite similar to Bollinger Bands.
Description
Envelope forex indicator for MT4 is freely available in your trading platform. The Envelopes indicator is visually very similar to the Bollinger Bands (BB), but it has some differences. The Envelope indicator is used based on the basic assumption that price often stabilizes and returns to its normal value even after a strong move caused by excessive pressure from bulls or bears when price values reach extremes. In other words, more time, the price is in a balanced state, and sellers or buyers only temporarily bring it out of equilibrium.
Like Bollinger Bands, the range of the Envelope’s price fluctuations lies in the range of the upper and lower borders of the indicator band.
How does the Envelopes indicator works?
Technically, Envelopes are two moving averages that form a band, the boundaries of which change depending on the market volatility. The period of moving averages is 14, but a standard deviation of 0.1% is used, so the moving averages are parallel to each other and are at a certain distance. Sometimes it is possible to draw a mid-line on the chart, from which the offset is calculated.
Visually, the Envelopes cover the price chart with a “tape”. With strong price movements, it is possible to break through the indicator limits and go beyond the “tape” (similar to BB), after which the price returns to its normal range.
How to interpret the Envelopes indicator?
Buy and sell signals will be considered reliable only if the price goes beyond the Envelope. In this case, it is desirable to receive confirmation of the beginning of the trend movement from another indicator.
Optimal use of the Envelopes indicator is when the trading is carried out inside the “tape”: we buy when the price touches the lower moving average and sell when the price approached the upper moving average.
If the border is broken, the position is closed. In this case, the boundaries of the Envelopes act as the boundaries of the price channel.
Advice: To hedge and eliminate a large number of false signals, a position should not be opened immediately when the price touches any of the bands, but when it is broken, and the price returns to the inside of the channel. It means the band should be broken from the opposite side.
While experimenting with standard indicator settings, remember that MA deviation above 2% will give little indication of volatility since the channel will be too wide in this case. It is desirable to use a deviation in the range of 0.1-2% and not higher.
The Envelopes indicator: some additional rules
- The system works better with the higher timeframes. The minimum recommended is from 30-minute and above.
- Wait for signal confirmation before entering the market. At least one candlestick or bar must close inside the channel.
- It is highly desirable to use another indicator, for example, RSI, to confirm signals.
- Place pending orders to close the position. The ideal point for placing a Take Profit order is usually exactly in the middle of the Envelope. The ideal point for placing a Stop Loss order is 5 points above/below the previous local high/low.
The Envelopes indicator conclusion
The Envelopes indicator can be easily installed and applied in your MT4 trading platform. It is based on moving averages and resembles the famous Bollinger Bands indicator. There are some rules to follow while applying the Envelope indicator in your trading. Always use other confirmatory tools like RSI alongside the Envelope indicator to increase your odds of success.