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# Envelopes Indicator

## Description of the Envelopes indicator

The Envelopes technical indicator is one of the easiest indicators to forex trading, is included in the list of basic indicators on forex trading floors. This forex indicator is built on the observation that after a price rises or falls, it returns to the basic trend.

Envelopes (Moving Average Envelopes) are plotted along two lines Moving AverageThe moving averages mark the upper and lower boundaries of the dynamic corridor of price movement. Moving averages mark the upper and lower limits of a dynamic corridor of price movement. If price crosses the boundaries of the corridor, it is considered to be either over- or underpriced and is expected to return within the corridor. It is the Envelopes indicator's job to identify the moment when price begins to return to the trend.

The Envelopes indicator has a number of customizable parameters on trading floors (Fig. 1). Among them: period, which determines the range of price values, based on which the central moving average is calculated, on the basis of which the lines-borders of the price corridor are built. The longer is the period, the slower indicator reacts to price changes. The lower the period, the faster reaction, but the higher the number of false signals.

Image. 1

The next parameter is the width of the channel, which is determined by the deviation of the lines from the central sliding. It is considered that deviation above 2% is excessive, because the indicator generates too many false signals. Such parameter as indicator shift shows shift of Envelopes lines by time. If the shift is specified by a positive number, the shift is directed forward, if it is negative, then it is directed backward. This parameter should soften the signal lag, which is typical for indicators on moving averages.

The trader selects the indicator values so that the price indices were as accurate as possible, i.e. there should be no doubts about rebounds from the price channel levels. At the same time, price movements should stay within the price corridor as long as possible and leave it only during the actual trend change.

## Calculation formula

The formula for calculating the construction of the Envelopes price channel boundaries:

top line = SMA (or other moving average) (1+k/1000), where:

k is the deviation coefficient (k/1000).

Lower boundary line = SMA (1-к/1000).

The indicator has the advantage that it has no ambiguity in interpretation. The advantage of the indicator is the exact determination of the flat movement and the moment when the flat movement ends. This allows you to trade within the channel without excessive stress pressure. Another advantage of the indicator is its simplicity and that it is easy to program it, to write an Expert Advisor based on it. automated trading.

The disadvantages of the indicator are that it generates a lot of false signals during strong price movements and that its signals are still lagging, and the indicator is not particularly effective.

The sliding indicator package is in the list of standard trend indicators in the MetaTrader4 and MetaTrader5 trading terminals (fig. 2).

Image. 2

The indicator has preset parameters of period, deviation, shift and Simple lines (SMA) (Fig. 3). Traders work mainly with these parameters, but they can be changed. The parameters are set depending on the currency pair and period, what parameters will be correct, the trader determines empirically.

Image. 3

It is more convenient to work with the Envelopes indicator with the average line, which should be loaded additionally. For example, Adaptive Moving Average (Fig. 4), it is highlighted by a white line on the graph.

Image. 4

The Envelopes indicator works more correctly than other slides oscillator ATR - true average range (Fig. 5).

Image. 5

In turn, the oscillator MACD (Fig. 6) helps to determine more accurately the beginning and end of the trend.

Image. 6

## Envelopes indicator in broker terminals

Image. 8

Also there are no sliding envelopes in the list of indicators Olymp Trade (site), it is recommended to download MT4 for strategies using it. In the trading terminal Binomo (bonus 100% to deposit by promo code REVIEWEEK100 - Activate) There is no Envelopes indicator, but you can still implement strategies using it if you use the indicator on the MT4 chart in parallel to trading on the trading floor.

## Envelopes indicator signals

The signals of the indicator in question are uncomplicated. For example, the indicator shows a signal about the possibility to make a deal, when the price breaks the border of the corridor. After the breakout, it is expected when the price returns to the channel, after which it is possible to open a deal. That is, in fact, trades are opened after two breakdowns of the channel.

The interpretation of the signal must take into account the direction of the channel movement. Accordingly, if the channel is moving upwards, the signals are expected from the lower line limiting the channel. If the channel moves downward, the signals are tracked from the upper border.

When the price reaches the upper boundary, a sell trade is opened, when the price reaches the lower boundary, a buy trade is opened. These signals are most clearly defined during a flat movement, but transactions are more effective when a clear trend is formed. Envelopes signals can be monitored without additional indicators and oscillators, but it is better to combine Envelopes with other indicators to confirm and refine signals.

## Trading strategies based on Envelopes

Envelopes strategies are not the most popular in forex trading, as they are not particularly different from other strategies based on moving averages. When using the indicator it is necessary to follow certain rules: analyze the price movements on at least half an hour timeframe, optimally from H1, because on less extended timeframes it is difficult to determine whether the signal was false or true. But there are strategies that are implemented on smaller timeframes.

When working with the Envelopes indicator on the candlestick chart it is recommended to open orders only after the close of the candle, indicating a reversal inside the price channel. In this case, almost all candles should be inside the price channel. If all of the following candles on the chart close above or below the crossed moving line, this indicates that the breakout is turning into a trend.

There are three main trading strategies using the Envelopes indicator. When working with the indicator, the upper line is regarded 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 through the price channel borders. With any strategy of using Envelopes indicator the result will be with additional indicators.

Another strategy is the impulse strategy, in which the entry is made on a strong price impulse, which is confirmed by the indicator. The trader waits for a breakout on the impulse and trades on it.

One strategy involves a combination of Envelopes and Bollinger Bands. The "Bollinger Bands" indicator is installed in the trading terminals among the standard tools (Fig. 8).

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The strategy is implemented on the time frame H1, on the chart of Japanese candles, the EUR / USD, in the terminal MT5.

We need to configure both indicators. Let's assume that parameters for Envelopes are as follows: indicator period: 200, shift: 1 to close prices, deviation: 0.15, line: Simple (Fig. 9).

Image. 9

Parameters of Bollinger Bands may be as follows: period: 20, shift: 0, deviation: 2, also by close prices (Fig. 10).

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As a result, the graph looks like this (Fig. 11). You can also add some variant of the moving average to the chart for more precise orientation in the channel boundaries.

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The opening of a buy trade is supposed to take place when a bullish candle crosses the upper line of the Envelopes indicator in the upward direction. The candle should close, the trade is carried out on the next candle. Bollinger Bands allow you to determine the location of the stop loss, which is placed behind the line of the Bollinger indicator.

A sell trade is made after a bearish candle crosses the bottom line of the Envelopes indicator from top to bottom. The deal is closed when the candle closes and the next candle is formed, confirming the trend. Stop-loss is placed behind the Bollinger Band indicator line. The strategy is not recommended for use in a highly volatile market.

Another strategy is based on the interaction of Envelopes and oscillator Stochastic (Fig. 12), which allows us to determine the entry point. The oscillator confirms the breakdown of the corridor border, which is outlined by the Envelopes indicator.

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Envelopes supported by the Moving Average is used for scalping on timeframes up to M30. For example, a period of 50 with a deviation of 0.2 is set for the Envelopes indicator, and the strategy is implemented by closing prices. The Moving Average indicator is set with a period of 15. Market entry points will be crossings of moving lines of the Envelopes indicator (Fig. 13).

Image 13.

Entry for a buy trade is determined by crossing the Envelopes indicator moving lines from bottom to top, entry for a sell trade is determined by crossing the Envelopes indicator moving lines from top to bottom.

## Conclusions

The Envelopes technical indicator is one of the standard indicators in forex trading terminals. It represents an "envelope" of two lines forming a price corridor, all price movements occur within this corridor.

Traders wait for the indicator to show prices approaching the bounding lines and trade on the price's return to the corridor boundaries. It is recommended to complement the Envelopes indicator when trading with other indicators and oscillators, this can increase its efficiency.

There are a number of strategies based on the indicator, which, in principle, are based on the same principles, so there is no diversity in these strategies. But they are simple enough to use. At the same time, when working with Envelopes, it is important to properly adjust the indicator so as to avoid signals becoming too rare or, on the other hand, too many false signals. Efficiency of the indicator's work should be confirmed by preliminary testing.

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