Construction & Interpretation

An earlier article described the uses, advantages and disadvantages of using moving averages. The Moving Average Envelope Indicator adds an extra feature to the regular moving average analysis.

Construction

The Envelopes are constructed by making bands above and below a given moving average at fixed percentages. These bands will be parallel lines to the average. Below, I used a 1% envelope around a 13 day moving average.

A trader will have to adjust the percentage depending on the currency pair and the timeframe he is looking at. One should try and have 90 percent of prices within the envelopes. The Moving Average Envelope indicator creates signals differently depending on whether the currency is trending or trading within a range.

Interpretation

• If the currency’s price is above the moving average, and touching or crossing the upper envelope boundary for an extended time, it is in an uptrend.
• If the currency’s price is hugging the bottom envelope border for an extended time then the currency is in a downtrend.
• When the price is oscillating between the two boundaries in a cyclical pattern, or moving sideways, then the currency is in a trading range.

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