Envelope is a type of technical indicator that is formed by using two moving averages where one of them is moving slightly up by a certain amount and the other is moving slightly down by the same amount. Envelope indicator is usually used by the investors and trader for helping identify high overbought and oversold in a market.
Moving average envelopes are also known as trading bands, and sometimes referred to as price envelopes, moving average bands or percentage envelopes. They are a natural trend following indicators.
Moving Average Envelopes is a helpful technical analysis tool for identifying overbought and oversold conditions where stock prices are on top or bottom of their prices. They are mostly used as a trend following indicator. Overbought conditions can be used as selling opportunities within a bigger downtrend. Oversold conditions are affirmed by using support and bullish reversal patterns.
First of all a moving average needs to be calculated. This can either be a simple moving average or an exponential moving average. They are calculated by shifted moving averages. Moving average envelope also shows when a price is "cheap" or "expensive." In a strongly trending market price usually stays in the upper part of the envelope for long periods.