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--- technical_indicators:moving_average_envelopes [2019/06/24 19:38]
127.0.0.1 external edit
+++ technical_indicators:moving_average_envelopes [2022/05/09 18:25]
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 Moving Average Envelopes are percentage-based envelopes set above and below a moving average. The moving average, which forms the base for this indicator, can be a simple or exponential moving average. Each envelope is then set the same percentage above or below the moving average. This creates parallel bands that follow price action. With a moving average as the base, Moving Average Envelopes can be used as a trend following indicator. Beyond simply trend following, though, the envelopes can also be used to identify overbought and oversold levels when the trend is relatively flat.
-===== Calculation =====
+===== Moving Average Envelope Calculation =====
 Calculation for Moving Average Envelopes is straight-forward. First, choose a simple moving average or exponential moving average. Simple moving averages weight each data point (price) equally. Exponential moving averages put more weight on recent prices and have less lag. Second, select the number of time periods for the moving average. Third, set the percentage for the envelopes. A 20-day moving average with a 2.5% envelope would show the following two lines:
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 The chart above shows IBM with a 20-day SMA and 2.5% envelopes. Note that the 20-day SMA was added to this SharpChart for reference. Notice how the envelopes move parallel with the 20-day SMA. They remain a constant 2.5% above and below the moving average.
-===== Interpretation =====
+===== Interpretating Moving Average Envelopes =====
 Indicators based on channels, bands and envelopes are designed to encompass most price action. Therefore, moves above or below the envelopes warrant attention. Trends often start with strong moves in one direction or another. A surge above the upper envelope shows extraordinary strength, while a plunge below the lower envelope shows extraordinary weakness. Such strong moves can signal the end of one trend and the beginning of another.
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 Sometimes a strong trend does not take hold after an envelope break and prices move into a trading range. Such trading ranges are marked by a relatively flat moving average. The envelopes can then be used to identify overbought and oversold levels for trading purposes. A move above the upper envelope denotes an overbought situation, while a move below the lower envelope marks an oversold condition.
-===== Parameters =====
+==== Parameters ====
 The parameters for the Moving Average Envelopes depend on your trading/investing objectives and the characteristics of the security involved. Traders will likely use shorter (faster) moving averages and relatively tight envelopes. Investors will likely prefer longer (slower) moving averages with wider envelopes.
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 Stock indices and ETFs require tighter envelopes because they are typically less volatile than individual stocks. The Alcoa chart has the same Moving Average Envelopes as the SPY chart. However, notice that Alcoa breached the 10% envelopes numerous times because it is more volatile.
-===== Trend Identification =====
+==== Trend Identification ====
 Moving Average Envelopes can be used to identify strong moves that signal the start of an extended trend. The trick, as always, is picking the correct parameters, which takes practice, trial and error. The chart below shows Dow Chemical (DOW) with the Moving Average Envelopes (20,10). Closing prices are used because moving averages are calculated with closing prices. Some chartists prefer bars or candlesticks to utilize the intraday day high and low. Notice how DOW surged above the upper envelope in mid-July and continued moving above this envelope until early August. This shows extraordinary strength. Also, note that the Moving Average Envelopes turned up and followed the advance. After a move from 14 to 23, the stock was clearly overbought. However, this move established a strong precedent that marked the beginning of an extended trend.
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 The indicator window shows the Stochastic Oscillator being used to identify overbought bounces. A move above 80 is considered overbought. Once above 80, chartists can then look for a chart signal or a move back below 80 to signal a downturn (red dotted lines). The first signal was confirmed with a support break. The second signal resulted in a whipsaw (loss) because the stock moved above 20 a few weeks later. The third signal was confirmed with a trend line break that resulted in a rather sharp decline.
-===== Similar to %Price Oscillator =====
+==== Similar to %Price Oscillator ====
 Before moving on to overbought and oversold levels, it is worth pointing out that Moving Average Envelopes are similar to the [[:technical_indicators:price_oscillators_ppo|Percent Price Oscillator (PPO)]]. Moving Average Envelopes tell us when a security is trading a certain percentage above a particular moving average. PPO shows the percentage difference between a short exponential moving average and a longer exponential moving average. PPO(1,20) shows the percentage difference between a 1-period EMA and a 20-period EMA. A 1-day EMA is equal to the close. 20-period Exponential Moving Average Envelopes reflect the same information.
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 The chart above shows the Russell 2000 ETF (IWM) with PPO(1,20) and 2.5% Exponential Moving Average Envelopes. Horizontal lines were set at 2.5% and -2.5% on the PPO. Notice that prices move above the 2.5% envelope when PPO moves above 2.5% (yellow shading) and prices move below the 2.5% envelope when PPO moves below -2.5% (orange shading). PPO is a momentum oscillator that can be used to identify overbought and oversold levels. By extension, Moving Average Envelopes can also be used to identify overbought and oversold levels. PPO uses exponential moving averages so it must be compared to Moving Average Envelopes using EMAs, not SMAs.
-===== Overbought/Oversold =====
+==== Overbought/Oversold ====
 Measuring overbought and oversold conditions is tricky. Even though one would expect an overbought stock to fall in price, securities can become overbought and remain overbought for some time during a strong uptrend. Similarly, securities in a strong downtrend can become oversold and remain oversold. In a strong uptrend, prices often move above the upper envelope and continue above this line. In fact, the upper envelope will rise as price continues above the upper envelope. Overbought moving average envelope readings can actually be a sign of strength during a strong uptrend. For this reason, overbought and oversold readings are best used when the trend flattens.
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 Moving Average Envelopes are mostly used as a trend following indicator, but can also be used to identify overbought and oversold conditions. After a consolidation period, a strong envelope break can signal the start of an extended trend. Once an uptrend is identified, chartists can turn to [[:technical_indicators:introduction_to_technical_indicators_and_oscillators#momentum_oscillators|momentum indicators]] and other techniques to identify oversold readers and pullbacks within that trend. Overbought conditions and bounces can be used as selling opportunities within a bigger downtrend. In the absence of a strong trend, the Moving Average Envelopes can be used like the Percent Price Oscillator. Moves above the upper envelope signal overbought readings, while moves below the lower envelope signal oversold readings. It is also important to incorporate other aspects of technical analysis to confirm overbought and oversold reading. Resistance and bearish reversal patterns can be used to corroborate overbought readings, while support and bullish reversal patterns can be used to affirm oversold conditions.
+===== Charting with Moving Average Envelopes =====
-===== Using with SharpCharts =====
+Moving Average Envelopes can be added to SharpCharts and ACP Charts.
+==== Using with SharpCharts ====
 Moving Average Envelopes can be found in SharpCharts as a price overlay. As with a moving average, the envelopes should be shown on top of a price plot. Upon selecting the indicator from the dropdown box, the default setting will appear in the parameters window (20,2.5). "MA Envelopes" are based on a simple moving average. "EMA Envelopes" are based on an exponential moving average. The first number (20) sets the periods for the moving average. The second number (2.5) sets the percentage offset. Users can change the parameters to suit their charting needs. The corresponding [[:technical_indicators:moving_averages|moving average]] can be added as separate overlay. [[https://stockcharts.com/h-sc/ui?s=SPY&p=D&st=2010-02-03&en=2010-10-09&id=p15714633106&listNum=30&a=211776022|Click here]] for a live example.
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 {{:technical_indicators:moving_average_envelopes:maen-9-shch.png|SharpCharts - Chart 9}}
+==== Using with StockChartsACP ====
+Moving Average Envelopes overlays based on either SMAs or EMAs can be added from the Chart Settings panel for your StockChartsACP chart. They are listed as "EMA Envelopes" and "SMA Envelopes" in the panel. Both types of Moving Average Envelopes can be overlaid on the security's price plot or on an indicator panel.
+{{:technical_indicators:moving_average_envelopes:maen-acp.png}}\\
+[[https://schrts.co/VqjedzIe|Click here for a live version of this chart.]]
+By default, the overlay uses a 20-period SMA or EMA and sets the bands 2.5 standard deviations above or below the moving average. These parameters can be adjusted to meet your technical analysis needs.
+===== Scanning for Moving Average Envelopes =====
+StockCharts members can screen for stocks based on Moving Average Envelope values. Below are some example scans that can be used for MA Envelope-based signals. Simply copy the scan text and paste it into the Scan Criteria box in the [[https://stockcharts.com/def/servlet/ScanUI|Advanced Scan Workbench]].
+Members can also set up alerts to notify them when a Moving Average Envelope-based signal is triggered for a stock. Alerts use the same syntax as scans, so the sample scans below can be used as a starting point for setting up alerts as well. Simply copy the scan text and paste it into the Alert Criteria box in the [[https://stockcharts.com/h-al/al|Technical Alert Workbench]].
-===== Suggested Scans =====
 ==== Oversold after Break above Upper Envelope ====
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 </code>
-For more details on the scan syntax to use for Moving Average Envelope scans, please see our [[docs>scans:indicators#moving_average_envelopes|Scanning Indicator Reference]] in the Support Center.
+For more details on the scan syntax to use for Moving Average Envelope scans, please see our [[https://support.stockcharts.com/doku.php?id=scans:indicators#moving_average_envelopes|Scanning Indicator Reference]] in the Support Center.
+===== Additional Resources =====
-===== Further Study =====
+==== Recommended Books ====
+The following books are available in the [[https://store.stockcharts.com|StockCharts Store]], and may be useful for learning more about Moving Average Envelopes.
 |  **Trend Trading for a Living**\\ Thomas Carr  |  **Trend Following**\\ Michael Covel  |