What are **moving average envelopes?**

Let’s rewind and briefly talk about moving averages first.

The goal of using moving averages is to **identify trend changes.**

While moving averages are a useful tool to have in your technical analysis toolbox, they can be susceptible to **providing false signals.**

Like you’ve learned in previous lessons on moving averages, a simple buy signal occurs when **prices close above the moving average**.

And a simple sell signal occurs when the ** price closes below the moving average**.

For example, let’s say EUR/USD is moving upward and closes above a __ moving average__ , signaling an entry to go long.

How do you know that this bullish trend is “real” and will continue?

You don’t.

So assuming you still want to go long, you have two options:

- Go long now based on the original entry signal (price closed above MA)
- Wait for more
**confirmation**that the trend is legit.

This is where **moving averages envelopes** (MAE) can help.

Huh? Moving average *envelopes*?

Like this?

No, not that kind of *envelopes*.

A moving average envelope consists of a **moving average AND two other lines**.

One line is ABOVE the moving average and the other line is BELOW the moving average.

** Together, these two lines form an upper and lower envelope. **

It’s called an envelope (noun) because these two lines *envelope* (verb) the original moving average line.

Moving averages envelopes are used to:

- Confirm
**trend** - Identify
**overbought and oversold conditions**

How to calculate a moving average envelope is pretty simple.

First, decide whether you want to use a**simple moving average (SMA)** or **exponential moving average (EMA)**.

Remember, EMAs have less lag because they put more weight on recent prices.

Then, select the number of time periods you wish to apply.

Lastly, set the percentage value you’d like to use for the envelopes.

For example, a 10-day moving average with a 1% envelope would show the following lines:

**Upper Envelope:** 10-day SMA + (10-day SMA x .01)

**10-day SMA**

**Lower Envelope:** 10-day SMA - (10-day SMA x .01)

The chart below shows EUR/USD with a **10-day SMA and 1% envelopes**.

Notice how the envelopes (blue lines) move parallel with the 10-day SMA (orange line).

They remain a **constant** 1% above and below the __ moving average__ (orange line).

Since the foundation of moving average envelopes (MAE) is the moving average, this means that the moving average envelopes can be used as a trend-following indicator.

** The direction of the moving average determines the direction of the envelopes. **

When the envelopes are moving higher, price is in an **uptrend**.

When the envelopes are moving lower, price is in a **downtrend**.

When the envelopes are moving sideways, price is neither in an uptrend or downtrend. The trend is neutral and price is considered directionless.

You should pay attention **when price moves above or below the envelopes**.

Since trends often begin with a strong move, if price surges above the upper envelope, this is considered **bullish**.

If price plunges below the lower envelope, this is considered **bearish**.

If price closes *above* the UPPER envelope, **buy**.

If price closes *below* the LOWER envelope, **sell**.

In the chart below, notice how the 20-day simple moving average (orange line) and the upper and lower envelopes (blue lines) are moving higher.

See how price managed to close above the moving average?

To confirm that the trend has changed from bearish to bullish, you could wait until the price has also closed above the upper envelope.

There will also be times when price initially moves above or below an envelope but turns back around.

This usually happens when the moving average slope is FLAT.

When this happens, moving average envelopes can be used to identify overbought and oversold levels.

When price moves above the upper envelope, this can be considered **overbought**.

When price moves below the lower envelope, this can be considered **oversold**.

Identifying overbought and oversold levels isn’t easy though.

Remember, a currency pair can become overbought and *remain* overbought when the bullish trend is strong.

The same goes for being oversold. In a strong bearish trend, something can be technically oversold, but *remain* oversold for quite some time.

This is why it’s best to pay attention to the **slope of the moving average** and make sure it’s **flat**.

You should confirm overbought and oversold levels with support and resistance levels.

If price touches or falls beneath the LOWER envelope, then rises back above, **buy**.

If price touches or rises above the UPPER envelope, then falls back below, **sell**.

In the chart below, notice how the 30 SMA (orange line) and the upper and lower envelopes (blue lines) are flat…almost horizontal even.

EUR/JPY is directionless here. There is no strong bullish trend, nor is there a strong bearish trend.

Observe how the upper envelope acts as a strong resistance level.

Whenever price traded near the upper envelope, price would fall back down.

The same with the lower envelope. Observe how it acts as a strong support level.

Whenever price traded near the lower envelope, price would bounce back up.

Moving average envelopes (MAE) are used as a tool to **confirm trend direction**, but can also be used in sideways markets to **identify overbought and oversold levels**.

Lesson 6: What is a Japanese Candlestick? Lesson 7 :Japanese Candlestick Anatomy Lesson 8:Basic Japanese Candlestick Patterns Lesson 9: Single Candlestick Patterns Lesson 10: Dual Candlestick Patterns Lesson 11: Triple Candlestick Patterns Lesson 12:Japanese Candlestick Cheat Sheet Lesson 13: Candlesticks with Support and Resistance Lesson 14: Common Mistakes That New Traders Make With Japanese Candlesticks Lesson 15: Summary: Japanese Candlesticks

Lesson 16 : Fibonacci Trading Lesson 17: How to Use Fibonacci Retracements Lesson 18: Fibonacci Retracements are NOT Foolproof Lesson 19: How to Use Fibonacci Retracement with Support and Resistance Lesson 20: How to Use Fibonacci Retracement with Trend Lines Lesson 21: How to Use Fibonacci Retracement with Japanese Candlesticks Lesson 22: How to Use Fibonacci Extensions to Know When to Take Profit Lesson 23: How to Use Fibonacci to Place Your Stop so You Lose Less Money Lesson 24: Summary: Fibonacci Trading

Lesson 25: What Are Moving Averages? Lesson 26: Simple Moving Average (SMA) Explained Lesson 27: Exponential Moving Average (EMA) Explained Lesson 28: Simple vs. Exponential Moving Averages Lesson 29: How to Use Moving Averages to Find the Trend Lesson 30: How to Use Moving Average Crossovers to Enter Trades Lesson 31: How to Use Moving Averages as Dynamic Support and Resistance Levels Lesson 32: How to Use Moving Average Envelopes Lesson 33: How to Analyze Trends With Moving Average Ribbons Lesson 34: How to Trend Trade with Guppy Multiple Moving Average (GMMA) Lesson 35: Summary: Using Moving Averages

Lesson 36: How to Use Bollinger Bands Lesson 38: How to Use the MACD Indicator Lesson 37: How to Use Keltner Channels Lesson 39: How to Use Parabolic SAR Lesson 40: How to Use the Stochastic Indicator Lesson 41: How to Use RSI (Relative Strength Index) Lesson 42: How to Use Williams %R (Williams Percent Range) Lesson 43: How to Use ADX (Average Directional Index) Lesson 44: Ichimoku Kinko Hyo Lesson 45: Trading with Multiple Chart Indicators Lesson 46: What is the Best Technical Indicator in Forex? Lesson 47: Summary: Popular Chart Indicators