Many traders prefer Envelopes – technical indicators plotted on a price chart with upper and lower bounds. Envelopes show prices, deviations, and trading ranges. In simple words, at the heart of the Envelopes indicator is a moving average. Inherent aspects of a moving average are consequently reflected in the Envelopes indicator. So what do we know about a moving average? A moving average is used as a trend-confirming tool; it also has uses as a trend-following tool; finally, it is a lagging indicator. All three of these aspects also apply to the Envelopes indicator.
Traders apply Envelopes in many different ways, but most use it to read trading ranges. When the price reaches the upper bound, the market is considered overbought, and a sell signal is generated. Conversely, when the price reaches the lower bound, the market is considered oversold, and a buy signal is generated.
Envelopes are commonly used in conjunction with other forms of analysis. For example, traders may identify potential opportunities when the price moves outside of the envelope and then look at chart patterns to identify when a tipping point is about to occur. Moving average envelopes are the most common type of envelope indicator. Defining a fixed percentage creates a simple envelope.
Pocket Option offers Envelopes in the standard list of trading tools.
How to Activate the Envelopes Indicator
As you know, an envelope, in technical analysis, refers to trend lines plotted both above and below the current price. Traders use it to monitor and check prices, to see if the market is overbought or oversold.
If you want to activate the Envelopes indicator, go to the Settings, click on the “Indicators” in the Pocket Option terminal and select the “Current” subsection. Find Envelopes Indicators and click on the pencil image.
You will have to set Period and Deviation (%). We recommend to start with 20 candles and then adjust them depending on the market situation.
If the market is highly volatile – use higher deviation. In standard situations, we recommend 0.05 to 0.5. The default value is set at 0.1. In other words, the deviation is the key parameter that sets how wide or narrow the envelopes will be. The value is specified as a percentage.
We recommend setting timeframes from H1 to D1. The expiration period should not exceed the time of formation of two candles.
Trading with the Envelopes Indicator
The indicator shows the range where the price tends to stay within the upper and lower thresholds during normal conditions. For volatile market, apply higher percentages when creating the Envelope to avoid market noise. For less volatile asset, apply lower percentages to create a sufficient number of trading signals.
If you are a beginner, here are some basic rules:
- Identify a sell signal when the price reaches or crosses the upper band. Identify a buy signal when the price reaches or crosses the lower band of the envelope. If you see that the candlestick closed on one of the extreme lines (lower or upper), consider a purchase.
- Identify a sell signal when the price reaches or crosses the upper band and identify a buy signal when the price reaches or crosses the lower band of an envelope. Usually, the contract is bought in the direction of the breakout. Notice when you get a big breakout above the upper envelope in the middle of the chart, it marks the start of a big upward slope in the price.
- Consider buying when you see that the line breaking envelope with the candle closing outside. The next candle may return inside the channel. Make a transaction following the last bar.
General rules of the strategy would be:
- Enter a long if the price breaks (closes) below the lower envelope and %R shows that it is oversold
- Enter a short if the price breaks above (closes) above the upper envelope and %R shows that it is overbought
Traders may have taken a short position when the price moved beyond the upper range and a long position when the price moved below the lower range. In these cases, the trader would have benefited from the reversion to the mean over the following periods. Traders may set stop-loss points at a fixed percentage beyond the upper and lower bounds, while take-profit points are often set at the midpoint line.
