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MOVING AVERAGE ENVELOPES
Doug Schaff
FX-Strategy
| Characteristic: | Support and Resistance Indicator | ||
| Parameter Defaults: | MA Period | 9 | controls the measurement period for the average |
| Percent Width | 2 | controls the percentage distance of the envelope from the MA | |
| Plots: | MaEnv_T | Envelope top | |
| MaEnv_B | Envelope bottom | ||
Moving Average Envelopes are calculated by taking a moving average, and calculating upper and lower trading bands as a fixed percentage above and below the moving average respectively.
These are considered to suggest extreme overbought or oversold conditions, and to identify trading ranges by the assumption that price should not deviate from the average of the underlying price element (high or low) by the percentage utilized.
However, it is important to ensure that price is not trending otherwise false signals will be generated.
The chart above displays the daily USDCHF market with touches by price of either envelope in either dark red or magenta. Where marked in dark red it can be seen that price is not making new extremes. It is important to remember that a trend is defined as higher highs and higher lows (uptrend) or lower lows and lower highs (downtrend).
At each of the points where the price touch is ringed in dark red it can be seen that price is still moving within recent price ranges and not establishing new extremes. At these points a reaction is seen against the main direction of price. This may not be sustained, but there is sufficient movement to provide a short term trade and profit.
At each of the points where the price touch is ringed in magenta it can be seen that price is establishing new extremes beyond the recent range. These trades provide greater risk and should be avoided.
