Envelopes are a technical tool used in market analysis, specifically in the realm of moving averages. This tool consists of two moving averages that are shifted in opposite directions, creating a band around the price plot. The upper and lower bands serve as boundaries for a security's normal trading range. When the price reaches the upper band, a sell signal is triggered, while a buy signal is generated at the lower band. The percentage shift of the moving averages is determined by the volatility of the security, with more volatile securities requiring a larger percentage shift. Envelopes are based on the idea that extreme market movements are often followed by a return to more realistic levels, much like Bollinger Bands. Thus, they can be a useful tool for identifying potential buying and selling opportunities.
