Envelope Indicator Guide for MT4/MT5
Envelope Indicator FAQ
What is an envelope indicator?
The envelope indicator stipulates that the price tends to stay within a forex range in normal market conditions. However, when the FX market shakes and conditions change, the price will potentially move above or below the envelope borders. This will give us trading signals. The envelopes Forex strategy work in combination with averages. And that is by plotting two visual borders around an MA basis. This basis line can be simple or exponential. The simple MA weights each price equally. Whereas the exponential one puts more weight on the latest prices with less lag. To summarize, two parameters compose this envelope strategy:
- A basis average line (Simple or Exponential)
- Upper and lower borders: The basis plus or minus a chosen deviation
Indicator formula
The Envelope is plotted by creating two borders at a distance above and beneath MA. We calculate the upper and the lower border using the next instructions:
- Upper border = [ SMA_N + ( SMA_N x Deviation % ) ]
- Lower border = [ SMA_N – ( SMA_N x Deviation % ) ]
To clarify, SMA is the denotation of the simple average. N is the number of periods used for the MA. D is the percentage or the value of deviation which separates the envelopes from the MA. Similarly, we consider a 55-day SMA and a 2.5% deviation.
- Upper border = [ 55-day SMA + ( 55-day SMA 2.5 % ) ]
- Lower border = [ 55-day SMA – ( 55-day SMA x 2.5 % ) ]
In general, a downtrend is present when the channel moves lower. Meanwhile, an uptrend exists when the channel moves higher. The trend is flat when the channel moves sideways. We use the envelope indicator to follow price action. As a consequence, we get an important signal when the price breaks one of the CFD market envelopes. A price tendency could start with a strong move in one direction. We get abnormal strength when prices break the upper envelope. Contrarily, we observe abnormal weakness when prices break lower envelope. Strong price movements can be a signal of a movement reversal.
How to trade with it?
First of all, we need to choose adequate parameters for our envelope analysis. To explain, Forex short-term investors use a smaller number of periods for MA. They also use a smaller deviation percentage D. And the contrary goes for long-term investors. as a matter of fact. Choosing the right parameters requires a lot of practice.
Determining Bullish or Bearish movements
Envelope indicators are essentially founded on averages. Furthermore, MA controls and determines the direction of the two envelopes. If the envelopes are higher, we have a Bullish price movement. And that is explained by a higher MA. If envelopes are downwards, we have a Bearish price movement. When envelopes move Left or Right, we have a neutral or directionless movement. Accordingly, when prices break through the upper border, it is considered Bullish. When prices dive under the lower border, it is considered Bearish.
In this example, we considered envelopes with a 30 day period and a 2.5% deviation percentage. As you can see, The price broke through the upper border at the 38878.48 horizontal line. Which translates to an abnormal movement strength. Therefore, a Bullish tendency. On the other hand, the price surged below the 37190.34 line. As a result, we get a strong move downwards and a Bearish tendency.
Trading decisions using the envelope indicator
We chose our parameters as the first step. Secondly, we identified whether to market is bearish or bullish. The third step is to trade. How so?
A signal to sell appears when the price crosses the upper border. Which means that it has extraordinary strength. We can sell at a price higher than the normal range. Conversely, A signal to buy takes place when prices cross the lower envelope. We can buy the asset at a price lower than the normal range. After that, we sell it when the prices retreat within the normal range.
Finding Overbought and Oversold zones
An envelope indicator can even help us to identify overbought and oversold areas. We identify an overbought zone when prices touch the upper border of the envelope. We should take a short position. And that’s because a price decrease is expected. Also, an oversold zone appears when prices touch the lower border. In this case, we should take a long position.
Download Envelope indicator for MT4
Envelopes MT4 Indicator is an extension of averages in Metatrader 4. It is formed of two MAs. One of them shifts upwards and another one shifts downwards to form an envelope. In crypto markets, envelopes define the upper and the lower margins of the price range. Hence, crypto traders will use the envelope indicator for MT4 to get alert strength signals. The graph below from the MetaTrader4 platform shows buy and sell signals once the price crosses borders.
Download Envelope indicator for MT5
Envelope indicator for MT5 takes place as one of the standard trading indicators embedded within the Metatrader 5. Forex traders value this tool because it identifies range breakout points. The concept behind this indicator is that buyers and sellers usually push prices to the extremes. After reaching these limits, prices start to regulate towards the normal range. This is similar to BB borders. Below is the location of the envelope indicator using an MT5 Forex chart.
Conclusion
To conclude, the envelope strategy alerts us about abnormal price strength or weakness. Also, parameters composing this indicator are MA_settings and the Deviation. This envelope shaping indicator is plotted by creating two borders at a distance above and beneath prices. A sell signal appears when the price breaks above the upper border. Contrarily, a buy signal arises when the price surge below the lower border.