This indicator in the form of two lines that wrap the movement of stock prices from the top and bottom so it is shaped like a tunnel. The lines on the upper side referred to as 'Upper bands', while the bottom line is called the 'Lower bands'. Determination of the line is based on a percentage value of the selected period of Moving Averages. Determination of the percentage value and a good period will show 95% of stock price movement is always in the tunnel produced by the two lines (see picture).
Stock price movements that are beyond the top line indicates the condition of being overbought or bearish signal. While the stock price movement beyond the bottom line indicates the condition being oversold or bullish signal. This method is called the Moving Average Envelopes.
But keep in mind that although sometimes a stock is in overbought or oversold condition may remain in the sentiment for some time. This would make the price even though its stock has been oversold still declining or already overbought but remain up. Because these two signals obtained from these indicators is better if confirmed by other indicators, like RSI or Stochastic, which are historical performing well enough if combined with MA Envelopes. The most important lesson to be learned from this indicator is traders can avoid buying when the conditions are overbought, or otherwise avoid short-sell when Envelopes indicate oversold.
Combination of settings commonly used is 3% of MA Envelopes (21) for short term traders (see picture) or using the Envelopes 5% of MA (21) for a more volatile stock. Determination of the percentage value and a good period will show 95% of stock price movement is always in the line of Envelopes. Perform back test it first!
Moving Average Envelopes formula:
Upper band: UB = MAT + (N% x MAT)
Lower band: LB = MAT + (L% x MAT)
MAT = Moving Average Current Value
Upper U% = percentage value
L% = Lower percentage values
Stock price movements that are beyond the top line indicates the condition of being overbought or bearish signal. While the stock price movement beyond the bottom line indicates the condition being oversold or bullish signal. This method is called the Moving Average Envelopes.
But keep in mind that although sometimes a stock is in overbought or oversold condition may remain in the sentiment for some time. This would make the price even though its stock has been oversold still declining or already overbought but remain up. Because these two signals obtained from these indicators is better if confirmed by other indicators, like RSI or Stochastic, which are historical performing well enough if combined with MA Envelopes. The most important lesson to be learned from this indicator is traders can avoid buying when the conditions are overbought, or otherwise avoid short-sell when Envelopes indicate oversold.
Combination of settings commonly used is 3% of MA Envelopes (21) for short term traders (see picture) or using the Envelopes 5% of MA (21) for a more volatile stock. Determination of the percentage value and a good period will show 95% of stock price movement is always in the line of Envelopes. Perform back test it first!
Moving Average Envelopes formula:
Upper band: UB = MAT + (N% x MAT)
Lower band: LB = MAT + (L% x MAT)
MAT = Moving Average Current Value
Upper U% = percentage value
L% = Lower percentage values
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