Envelopes Indicator
Envelopes indicator is a free technical analysis tool that traders can use to their advantage. The tool helps identify trends and potential trend reversals. The indicator is based on moving averages and works similarly to Bollinger Bands.
Description
Envelopes Forex indicator for MT5 is freely available in your trading platform. The Envelopes indicator is visually very similar to the Bollinger Bands (BB), but has some differences. The Envelope indicator is used based on the basic assumption that the price often stabilizes and returns to its normal value even after a strong move caused by excessive pressure from the bulls or bears when the price values reach extremes. In other words, more time the price is in equilibrium, and sellers or buyers only temporarily bring it out of balance.
Like Bollinger Bands, the range of Envelope price fluctuations lies in the range of the upper and lower borders of the indicator band.
How does the Envelopes indicator work?
Technically, Envelopes are two moving averages that form a band, the boundaries of which change depending on the market volatility. The period of the moving averages is 14, but a standard deviation of 0.1% is used, so the moving averages are parallel to each other and at a certain distance. Sometimes a middle line can be drawn on the chart, from which the offset is calculated.
Visually Envelopes close the price chart with a “ribbon”. With strong price movements, it is possible to break through the boundaries of the indicator and go beyond the “tape” (similar to the BB), after which the price returns to its usual range.
How to interpret the Envelopes indicator?
Buy and sell signals will only be considered reliable if the price is outside the envelope. In this case, it is desirable to receive confirmation of the beginning of a trend movement from another indicator.
The optimal use of the Envelopes indicator is when trading inside the band: we buy when the price touches the lower moving average and sell when the price approaches the upper moving average.
If the boundary is violated, 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 one of the bands, but when it breaks through, and the price returns inside the channel. This means that the tape must be torn from the opposite side.
When experimenting with the standard settings of the indicator, remember that moving average deviation above 2% does not indicate much volatility, because in this case the channel will be too wide. It is desirable to use a deviation in the range of 0.1-2% and not higher.
Some additional rules:
- The system works better on larger timeframes. The minimum recommended duration is 30 minutes or more.
- Wait for signal confirmation before entering the market. At least one candle or bar must close inside the channel.
- It is highly recommended to use another indicator, such as RSI, to confirm signals.
- Place pending orders to close the position. The ideal point to place a Take Profit order is usually exactly in the middle of the envelope. The ideal point to place a Stop Loss order is 5 pips above/below the previous local High/Low.
Conclusion
The Envelopes indicator can be easily installed and used on your MT5 trading platform. It is based on moving averages and resembles the famous Bollinger Bands indicator. There are a few rules to follow when using the Envelope indicator in your trading. Always use other confirming tools such as RSI along with the Envelope indicator to increase your chances of success.