Envelope

Definition:

Envelopes help define the upper and lower boundaries of normal price action. Envelope Bands are composed of two moving averages, one of which is shifting upwards and the other shifting downwards.

Background:

These bands are used by traders to help define price action's upper and lower boundaries. Traders may consider selling a security when price reaches the upper band, and buying when price reaches the lower band. The psychology behind the usage of envelopes is based on the sellers' and buyers' perception that price action will bounce off the bands. Even though overzealous buyers and sellers will momentarily pressure price beyond price action extremes (bands), price should return to more normal levels found within the Envelope.

Practical Use:

When using the Envelope, entry and exit signals are assessed by most technical analysts in context with both price and volume of the chart being analyzed.