Moving Average Envelopes

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technical_indicators:moving_average_envelopes [2019/09/07 00:12]
betseyp [Overbought after Break below Lower Envelope]
technical_indicators:moving_average_envelopes [2022/06/15 23:38] (current)
betseyp [Using with SharpCharts]
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 ===== Introduction ===== ===== Introduction =====
  
-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.  ​+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. ​
  
-===== Calculation =====+{{:​technical_indicators:​moving_average_envelopes:​maen-intro.png}}\\ 
 +[[https://​stockcharts.com/​h-sc/​ui?​s=HLT&p=D&b=5&g=0&id=p29369358695|Click here for a live version of this chart.]]
  
-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:+ 
 +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.   
 + 
 +===== Moving Average Envelope ​Calculation ​===== 
 + 
 +==== Formulas ==== 
 +Calculating ​Moving Average Envelopes is straightforward. 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:
  
 <​code>​ <​code>​
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 {{:​technical_indicators:​moving_average_envelopes:​maen-1-ibmexam.png|Moving Average Envelopes - Chart 1}} {{:​technical_indicators:​moving_average_envelopes:​maen-1-ibmexam.png|Moving Average Envelopes - Chart 1}}
  
-The chart above shows IBM with 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. ​+The chart above shows IBM with 20-day SMA envelopes set at 2.5% (blue). Note that the 20-day SMA (red) 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 ===== +==== Adjusting ​the Settings ​====
- +
-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.  +
- +
-With a [[:​technical_indicators:​moving_averages|moving average]] as its foundation, Moving Average Envelopes are a natural trend following indicator. As with moving averages, the envelopes will lag price action. The direction of the moving average dictates the direction of the channel. In general, a downtrend is present when the channel moves lower, while an uptrend exists when the channel moves higher. The trend is flat when the channel moves sideways.  +
- +
-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 =====+
  
 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. ​ 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. 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 ​=====+===== Interpreting 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.  
 + 
 +With a moving average as its foundation, Moving Average Envelopes are a natural trend following indicator. As with moving averages, the envelopes will lag price action. The direction of the moving average dictates the direction of the channel. In general, a downtrend is present when the channel moves lower, while an uptrend exists when the channel moves higher. The trend is flat when the channel moves sideways.  
 + 
 +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.  
 + 
 +**Learn More:** [[:​technical_indicators:​moving_averages|Moving Averages]] 
 + 
 +==== 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. ​ 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. ​ 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 ===== 
  
-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 averagePPO 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+==== Overbought/​Oversold ==== 
 +  
 +Moving Average Envelopes are actually quite similar to the Percent Price Oscillator (PPO), a momentum oscillator which is often used to identify overbought and oversold levels. Moving Average Envelopes tell us when a security is trading a certain percentage above or below a moving average, while the PPO shows the percentage difference between a short EMA and a longer EMA. 
  
 {{:​technical_indicators:​moving_average_envelopes:​maen-6-iwmppo.png|Moving Average Envelopes - Chart 6}} {{:​technical_indicators:​moving_average_envelopes:​maen-6-iwmppo.png|Moving Average Envelopes - Chart 6}}
  
-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+In the example ​chart above, we can see that the PPO (1,20), which shows the difference between a 1-day EMA (essentially the close) and a 20-day EMA, is giving ​the exact same signals as the 20-day EMA Envelopes. 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). ​
  
-===== Overbought/​Oversold ===== +These PPO moves above or below a specified threshhold can indicate ​overbought ​or oversold conditions; by extensionmoves above or below the Moving Average Envelopes ​can be interpreted ​in the same wayPrice moves above the upper envelope line can indicate that a security is overbought; conversely, price moves below the lower envelope ​line can indicate ​oversold ​conditions.
-  +
-Measuring ​overbought ​and oversold conditions ​is tricky. Even though one would expect an overbought stock to fall in pricesecurities ​can become overbought and remain overbought for some time during a strong uptrend. Similarly, securities ​in a strong downtrend can become oversold and remain oversoldIn a strong uptrend, prices often move above the upper envelope ​and continue above this line. In factthe 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.+
  
-The chart for Nokia has it all. The pink lines represent the Moving Average Envelopes (50,10). A 50-day simple moving average is in the middle (red). The envelopes are set 10% above and below this moving average. The chart starts with an overbought level that stayed overbought as a strong trend emerged in April-May. Price action turned choppy from June to April, which is the perfect scenario for overbought and oversold levels. Overbought levels in September and mid-March foreshadowed reversals. Similarly, oversold levels in August and late October foreshadowed advances. The chart ends with an oversold condition that remains oversold as a strong downtrend emerges. ​+However, 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**. 
 + 
 +The following ​chart for Nokia has it all. The pink lines represent the Moving Average Envelopes (50,10). A 50-day simple moving average is in the middle (red). The envelopes are set 10% above and below this moving average. The chart starts with an overbought level that stayed overbought as a strong trend emerged in April-May. Price action turned choppy from June to April, which is the perfect scenario for overbought and oversold levels. Overbought levels in September and mid-March foreshadowed reversals. Similarly, oversold levels in August and late October foreshadowed advances. The chart ends with an oversold condition that remains oversold as a strong downtrend emerges. ​
  
 {{:​technical_indicators:​moving_average_envelopes:​maen-7-nokoverbs.png|Moving Average Envelopes - Chart 7}} {{:​technical_indicators:​moving_average_envelopes:​maen-7-nokoverbs.png|Moving Average Envelopes - Chart 7}}
  
 Overbought and oversold conditions should serve as alerts for further analysis. Overbought levels should be confirmed with chart resistance. Chartists can also look for bearish patterns to reinforce reversal potential at overbought levels. Similarly, oversold levels should be confirmed with chart support. Chartist can also look for bullish patterns to reinforce reversal potential at oversold levels. ​ Overbought and oversold conditions should serve as alerts for further analysis. Overbought levels should be confirmed with chart resistance. Chartists can also look for bearish patterns to reinforce reversal potential at overbought levels. Similarly, oversold levels should be confirmed with chart support. Chartist can also look for bullish patterns to reinforce reversal potential at oversold levels. ​
 +
 +**Learn More:** [[:​technical_indicators:​price_oscillators_ppo|Percent Price Oscillator (PPO)]]
  
 ===== Conclusion ===== ===== Conclusion =====
  
-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+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 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 readings. 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. ​
  
-===== Using with SharpCharts ​=====+===== Charting ​with Moving Average Envelopes ​=====
  
-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.+Moving Average Envelopes can be added to SharpCharts and ACP Charts. 
 + 
 +==== Using with SharpCharts ==== 
 + 
 +{{:​technical_indicators:​moving_average_envelopes:​maen-shch.png}}\\ 
 +[[https://​stockcharts.com/​h-sc/​ui?​s=GE&​p=D&​b=5&​g=0&​id=p81554262635|Click here for a live version of this chart.]] 
 + 
 +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). "SMA 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 moving average can be added as separate overlay, as in the example ​chart above.
  
 {{:​technical_indicators:​moving_average_envelopes:​maen-9-shch.png|SharpCharts - Chart 9}} {{:​technical_indicators:​moving_average_envelopes:​maen-9-shch.png|SharpCharts - Chart 9}}
  
 +For more details on the parameters used to configure Moving Average Envelope overlays, please see our [[https://​support.stockcharts.com/​doku.php?​id=sharpcharts:​reference#​sma_envelopes|SharpCharts Parameter Reference]] in the Support Center. ​
 +
 +==== 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 ==== ==== Oversold after Break above Upper Envelope ====
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 <​code>​ <​code>​
 [type = stock] AND [country = US]  [type = stock] AND [country = US] 
-AND [Daily SMA(20,Daily Volume) > 40000]  +AND [SMA(20,​Volume) > 40000]  
-AND [Daily SMA(60,Daily Close) > 10] +AND [SMA(60,​Close) > 10] 
  
-AND [20 days ago Daily Close > 20 days ago Daily Upper MA Env(50,​10.0,​Daily Close)]  +AND [20 days ago Close > 20 days ago Upper MA Env(50,​10.0,​Close)]  
-AND [Daily CCI(10) < -100]+AND [CCI(10) < -100]
 </​code>​ </​code>​
  
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 <​code>​ <​code>​
 [type = stock] AND [country = US]  [type = stock] AND [country = US] 
-AND [Daily SMA(20,Daily Volume) > 40000]  +AND [SMA(20,​Volume) > 40000]  
-AND [Daily SMA(60,Daily Close) > 10] +AND [SMA(60,​Close) > 10] 
  
-AND [20 days ago Daily Close < 20 days ago Daily Lower MA Env(50,​10.0,​Daily Close)]  +AND [20 days ago Close < 20 days ago Lower MA Env(50,​10.0,​Close)]  
-AND [Daily CCI(10) > 100]+AND [CCI(10) > 100]
 </​code>​ </​code>​
  
 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. 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.
  
-===== Further Study =====+===== Additional Resources ​===== 
 + 
 +==== Recommended Books ==== 
 +Even though Moving Average Envelopes are not used specifically in Thomas Carr's //Trend Trading for a Living//, the book shows traders how to trade in the direction of the underlying trend. Carr also shows readers how to configure a bullish and bearish watch list from which to set your entry and exit prices. 
 + 
 +Michael Covel'​s //Trend Following// introduces the fundamental concepts and techniques for a variety of trend following systems. Covel shows why market prices contain all available information,​ and readers will learn how to interpret price movements and profit from trend following.
  
 |  **Trend Trading for a Living**\\ Thomas Carr  |  **Trend Following**\\ Michael Covel  | |  **Trend Trading for a Living**\\ Thomas Carr  |  **Trend Following**\\ Michael Covel  |
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