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.