NUMERIC METHOD (ENVELOPE)

1.      Introduction

The Moving Average Envelope (MAE) is a reduction of the study moving average. The concept is very simple, just add and subtract the moving average ordinary by a certain percentage. Moving Average Envelopes are percentage-based envelopes set above and below a moving average. The moving average, which forms the base for this indicator, can be a simple or exponential moving average. Each envelope is then set the same percentage above or below the moving average. This creates parallel bands that follow price action. With a moving average as the base, Moving Average Envelopes can be used as a trend following indicator. However, this indicator is not limited to just trend following. The envelopes can also be used to identify overbought and oversold levels when the trend is relatively flat.

Moving Average Envelopes are percentage-based envelopes set above and below a moving average. The moving average, which forms the base for this indicator, can be a simple or exponential moving average. Each envelope is then set the same percentage above or below the moving average. This creates parallel bands that follow price action. With a moving average as the base, Moving Average Envelopes can be used as a trend following indicator. However, this indicator is not limited to just trend following. The envelopes can also be used to identify overbought and oversold levels when the trend is relatively flat

MAE uses only one moving average that has specific. We can also determine the price of a bond. The price level has two lines the same distance from the mean of moving average which exponential, smooth, or normal. Lines moving average is invisible. Although there are several approaches, but the most simple which uses the price level as the initial price and the final price. When the price moves to a higher price level, we can begin purchasing activities. When it has been in the position of shorter, then we can put an end to the activities of purchase. Conversely when the price moves to lower price level, then we end purchase activities and make the sale.

Moving Average Envelopes consist of a moving average plus and minus a certain user defined percentage deviation. Moving Average Envelopes serve as an indicator of overbought or oversold conditions, visual representations of price trend, and anindicator of price breakouts. The inputs of the Moving Average Envelopes indicator is shared below:

1.      Moving Average: A simple moving average of both the highs and the lows. (generally 20-period, but varies among technical analysts; also, a person could use only the close when calculating the moving average, rather than two)

2.      Upper Band: The moving average of the highs plus a user defined percentage increase (usually between 1 & 10%).

3.      Lower Band: The moving average of the lows minus a user defined percentage (again, usually between 1 & 10%).

In the Kaufman book, entitled Commodity Trading Systems and Methods, the writer suggest some approaches, as follows:

1.      To conduct the purchase or sale in the closing stages after the signal has been flagged.

2.      Delaying the purchase or sale activity for 1-3 days after being given the signal.

3.      Conducting buy or sell after prices back to initial position by 50% (or other percentage) that follow a sign or signal.

4.      To conduct the purchase or sale when the price moves in the range of a predetermined risk to a point where we are required to stop after having spending a certain amount.

2.      Literature Envelopes

A type of technical indicator typically formed by two moving averages that define upper and lower price range levels. An envelope is a technical indicator used by investors and traders to help identify extreme overbought and oversold conditions in a market. The envelopes, which typically appear overlaid on a price chart, are also useful in identifying trading ranges for a particular trading instrument.

A moving average envelope calculates two moving averages using the high price and low price inputs. Both averages are calculated using price data from the same number of bars, as determined by the input length. The average of the high price is increased by a user-specified percent and then plotted; the average of the low price is reduced by a user-specified percentage and then plotted. The envelope inputs can be customized to suit each investor's or trader's style and preferences.

While traders may interpret and apply the information in unique ways, many traders use an envelope so that a sell signal occurs when price reaches the upper band, signifying an overbought market, and a buy signal occurs when price drops to the lower band, representing an oversold market. Since a trading instrument's price tends to stay within the range represented by an envelope, the theory is that prices will continue to bounce between the upper and lower thresholds.

In Envelopes setting, The period set in default is 14 in the Meta trader, whereas the deviation set is 0.1 or 0.1%. This indicator is same as Bollinger Band as both shows the price moves to their extremes.

SMA/WMA/EMA Envelopes plot a band composed of two moving averages, one which is shifting upwards, the other shifting downwards, to help define a stock's upper and lower boundaries. The bands of an envelope are calculated as follows:

Upper Band = MA(CLOSE, N)*[1+K/100]

Lower Band = MA(CLOSE, N)*[1-K/100]

Where:

MA — Simple (or Weighted or Exponential) Moving Average;

N — averaging period;

K/100 — the value of shifting from the average (measured in basis points).

In addition, the envelope is a technical indicator used by investors and traders to help identify the state of excessive purchases and sales in the market. The envelope that usually appears repeatedly is also useful for identifying levels of trade for a trading instrument that is special.

A moving average envelope is useful to calculate two moving averages using the input (starting price) is high or low. The average of the two prices is calculated using the price data of the same bar, which is specified by the length of the input bar. The average of the high price can be enhanced by percent user-specific and then by way of the plot while the average low price can be lowered by a specific percentage of the user and then by  plot. The input of the envelope can be adjusted to fit each way and options held by the investor or trader.

3.      Formula

Calculation for Moving Average Envelopes is straight-forward. First, choose a simple moving average or exponential moving average. Simple moving averages weight each data point (price) equally. Exponential moving averages put more weight on recent prices and have less lag. Second, select the number of time periods for the moving average. Third, set the percentage for the envelopes. A 20-day moving average with a 2.5% envelope would show the following two lines:

Upper Envelope: 20-day SMA + (20-day SMA x .025)

Lower Envelope: 20-day SMA - (20-day SMA x .025)

The chart above shows IBM with a 20-day SMA and 2.5% envelopes. Note that the 20-day SMA was added to this SharpChart for reference. Notice how the envelopes move parallel with the 20-day SMA. They remain a constant 2.5% above and below the moving average.

Interpretatiaon, Indicators based on channels, bands and envelopes are designed to encompass most price action. Therefore, moves above or below the envelopes warrant attention. Trends often start with strong moves in one direction or another. A surge above the upper envelope shows extraordinary strength, while a plunge below the lower envelope shows extraordinary weakness. Such strong moves can signal the end of one trend and the beginning of another.

With a moving average as its foundation, Moving Average Envelopes are a natural trend following indicator. As with moving averages, the envelopes will lag price action. The direction of the moving average dictates the direction of the channel. In general, a downtrend is present when the channel moves lower, while an uptrend exists when the channel moves higher. The trend is flat when the channel moves sideways.

Sometimes a strong trend does not take hold after an envelope break and prices move into a trading range. Such trading ranges are marked by a relatively flat moving average. The envelopes can then be used to identify overbought and oversold levels for trading purposes. A move above the upper envelope denotes an overbought situation, while a move below the lower envelope marks an oversold condition.

The Future Source software system is a system that first calculate moving average. then The system calculates the percentage of the price level in the range of moving average with the following formula:

Mat = (P1 +... + Pn) / n

• Mat is the moving average.

• Pn price on the n-th interval

• n is the length of the moving average.

In the use of the software, when will calculate the average level of prices, we must put a percentage value on the price level in units of percent. By looking at the percentage of parameter below, the calculations can be done as follows:

UBt = Mat + (Mat * %P)
LBt = Mat - (Mat * %P)

• UBT is a higher price level

• LBT is the lower price level

• Mat is the moving average for the current interval.

• % P is the percentage for the price level.

The parameters for the Moving Average Envelopes depend on your trading/investing objectives and the characteristics of the security involved. Traders will likely use shorter (faster) moving averages and relatively tight envelopes. Investors will likely prefer longer (slower) moving averages with wider envelopes.

Parameters:

a.       Period (10) - the number of bars or the period used to calculate the moving average.

b.      Percent (50) - the percentage of the value used for the price level is (1/100). For example, 30 indicates 30/100.

c.       Appearances / concealment midpoint (0). - This parameter is used to show or hide the midpoint value for the price level. 0 hide, 1: show

 Disadvantages Technical Analysis Envelope

a.       Can not help investors to know the state of excessive purchases and sales in the market.

b.      For Indonesia, in the technical analysis of the envelope type used is about 10%.

c.       Unable to capture the short term trend changes.

Conclusion

    Moving Average Envelopes are percentage-based envelopes set above and below a moving average. The moving average, which forms the base for this indicator, can be a simple or exponential moving average. Each envelope is then set the same percentage above or below the moving average. This creates parallel bands that follow price action. With a moving average as the base, Moving Average Envelopes can be used as a trend following indicator. However, this indicator is not limited to just trend following. The envelopes can also be used to identify overbought and oversold levels when the trend is relatively flat

A type of technical indicator typically formed by two moving averages that define upper and lower price range levels. An envelope is a technical indicator used by investors and traders to help identify extreme overbought and oversold conditions in a market. The envelopes, which typically appear overlaid on a price chart, are also useful in identifying trading ranges for a particular trading instrument.

Moving Average Envelopes are mostly used as a trend following indicator, but can also be used to identify overbought and oversold conditions. After a consolidation period, a strong envelope break can signal the start of an extended trend. Once an uptrend is identified, chartists can turn to momentum indicator and other techniques to identify oversold readers and pullbacks within that trend. Overbought conditions and bounces can be used as selling opportunities within a bigger downtrend. In the absence of strong trend, the Moving Average Envelopes can be used like the Percent Price Oscillator. Moves above the upper envelope signal overbought readings, while moves below the lower envelope signal oversold readings. It is also important to incorporate other aspects of technical analysis to confirm overbought and oversold reading. Resistance and bearish reversals patterns can be used to corroborate overbought readings. Support and bullish reversal patterns can be used to affirm oversold conditions.