Moving averages are uniquely powerful in all that they can do. They provide certain information to traders that other indicators and other pieces of news simply do not.
That being said, they are not without their flaws. One of the biggest flaws that people point out is that moving averages are prone to giving false signals.
Just when a trader thinks that they have found a reversal in the trend of a market, they may actually have walked into a trap of sorts.
The signals that they see may be false indicators of what is really going on, and they may end up losing on trades that should have been winners. In order to avoid this as much as possible, traders are encouraged to look for moving average envelopes.
What Is a Moving Average Envelope?
The moving average envelope is the moving average combined with two other lines that form a channel of sorts that show where the support and resistance areas are for a given market.
It is important to design and use these envelopes as a way of seeing how various markets may react to certain pieces of news or other bits of data that are important to the overall functioning of the market.
Additionally, the moving average envelope is better at confirming a new trend than when just the moving average is used alone.
To calculate the moving average envelope, you need to decide if you will use the simple moving average (SMA) or the exponential moving average (EMA).
Most traders prefer the exponential one because it reacts more rapidly to the precise movements of the market as they exist today.
Therefore, it just makes sense that people would want to do what they need to do based on the very latest data available to them.
Take the EMA and multiply it by .01 in order to form a 1% envelope to both the upside and the downside. You will see on your chart that you have formed a channel for where the price may be headed next.
You can use this chart as your guidepost for determining where it is most likely that your preferred market will move. If you have drawn the chart well, and if you have good calculations throughout, then you should be in decent shape to place your trades based on the information available to you here.
You can see where there could be potential areas for resistance and support throughout the market, and that is especially important to a lot of people. They want the opportunity to know right where they need to place their lines, and the best way to do that is to have a channel like this.
Bullish or Bearish?
Looking at the envelope that you have drawn, do you see where there are bullish or bearish indicators?
They should present themselves in the sense that you know if the pair breaks above your envelope lines, then it is a bullish sign, but if it breaks below, then this is a bearish sign. It is truly as simple as that. You just plug those indicators in and then wait for the price action to do what it is going to do. You don’t need to make it any more complicated. Just wait until the price movement does what it needs to do, and you are all set.
You should try to make sure that the signals that you get from these indicators are fine-tuned, and it is ideal if you could back-test your envelopes to ensure that they are working properly, but beyond that, you should be all set.
Just create those figures and wait until you get the signals. If you see that there are some issues with the envelopes that you have drawn, then perhaps look over them again to make sure you have everything set in place perfectly to create the kind of chart that you need. In other words, always verify that your charts are actually be drawn correctly per the information available to you.
If you are uncertain about this, then go back to the drawing board until you are completely positive that your charts are accurate. You don’t want to take chances when trading with a potentially faulty chart.
The moving average envelope is a wonderful way to start building up your portfolio as it will help you identify when to get into trades and when you should exist them. Use every piece of information that these charts provide to help yourself out.
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