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  1. #1
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    Default Envelopes Forex trading indicator

    Envelopes (Price Channel)

    It is quite difficult to draw straight support / resistance lines as the market accelerates or slows down its pace. With the help of the indicator we can create a flexible channel which reacts to the market change rate.
    It is built on basis of the simple moving average which moves upwards or downwards at some percentage size with the most part of price fluctuations to be within these lines.

    Upper border:
    U = ( 1 + u / 100 ) x SMA (P, n);
    Lower border:
    L = ( 1 d / 100 ) x SMA (P, n), где
    U upper line of the price channel,
    L lower line of the price channel,
    u % above the moving average,
    d % below the moving average,
    SMA (P, n) simple moving average.

    The percentage (u and d) should be set so that about 95% of price activity is contained within the envelope and 5% outside it. The indicator will then be adequate to the market balance and all prices will come back to the envelope after they exit it.

    best regards
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  2. #2
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    Default Envelopes Forex trading indicator, Moving Average Envelopes, Trading Bands.

    Upper and lower Envelope lines are draws under and below moving average trading indicator on distance, which equal fixed percent of this moving average. Envelope trading indicator is usually used for trading, based on overbuy and oversell principles: it's sell, when the price reached upper Envelope line and buy, if price reached lower Envelope line. Moving average period and percent value are depends on price volatility.

    As a rule, more high volatility is force to make more long distance from moving average to Envelope lines. In case, when excessively zealous buyers and sellers moved price to its extremely values, and lower Envelope lines it's support and resistance for change price trend and back it to its moving average or even opposite Envelope line. Envelope parameters can changed in depend on price movement and its volatility. Some analytics advised to use Envelope with period 21 and draw its lines on distance, equal 3.5 percents of its moving average. So, upper Envelope line draw in distance 3.5 percents of its moving average and lower Envelope line - minus 3.5 percents from its moving average.

    best regards
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  3. #3
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    Default

    Envelopes represent bands that are plotted in a certain, identical relationship above and below the Moving Average. Envelopes are a very complex theme with many interpretation and trading rules. Basically, envelopes capture a significant part of price movements. Concrete trading signals are released if prices approach or move away form their envelope.

    Envelopes are plotted around a Moving Average in a constant percentage distance. Hence they are added to or subtracted from this average. Both envelope lines thus define the prevailing trading range.
    Properties

    Period. The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. The application uses a default of 10.

    Percent. A factor, expressed in percentage points, that is added to and subtracted from the Moving Average. For example, a value of “2.0” represents a 2.0% shift that will be added to the Moving Average, and a -2.0% shift that will be added to the Moving Average. The application uses a default of 1.0.

    Aspect: The Symbol field on which the study will be calculated. Field is set to “Default”, which, when viewing a chart for a specific symbol, is the same as “Close”.
    Interpretation

    The Envelope study is a derivative of the Moving Average study. The price band has two lines that are equal percentage distance from the Simple Moving Average. The Moving Average line is not visible.

    While several different trading rules are available, the most simple approach uses the price band as an entry and exit point. When price penetrates the upper price band, you initiate a long position or buy. If you have an existing short position, you close out shorts and go long. Conversely, when prices penetrate the lower price band, you close out long positions and go short.

    In Kaufman’s book, Commodity Trading Systems and Methods, he suggests several other approaches. They are as follows:

    * Buy or sell on the close after a signal is indicated.
    * Buy or sell on the next market open following a signal.
    * Buy or sell with a delay of 1-3 days after the signal.
    * Buy or sell after a price retracement of 50% (or some other value) following a signal.
    * Buy or sell when prices move to within a specified risk relative to a stop-loss point.

    In the case of using the Moving Average envelope on intraday prices, Kaufman suggested the following rule: “Only one order can be executed in one day, either the liquidation of a current position or an entry into a new position.”

    best regards
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  4. #4
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    Default

    Drawbacks of Envelopes
    The problem with relying on moving averages to define trading signals is easy to spot.To limit the number of whipsaw trades, some technicians proposed adding a filter to the moving average. They added lines that were a certain amount above and below the moving average to form envelopes. Trades would only be taken when prices moved through these filter lines, which were called envelopes because they enveloped the original moving average line.
    The goal of using moving averages or moving-average envelopes is to identify trend changes. Often, the trends are large enough to offset the losses incurred by the whipsaw trades, which makes this a useful trading tool for those willing to accept a low percentage of profitable trades for more on identifying market trends.

    best regards
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  5. #5
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    Default trading bands

    Basically, moving average envelopes or trading bands are calculated by taking a moving average and calculating upper and lower trading bands as a fixed percentage above and below the moving average respectively.

    These are considered to suggest extreme overbought or oversold conditions. The assumption is that, price should not deviate from the average of the underlying price element (high or low) by the percentage utilized.

    They differ from Bollinger bands, since Bollinger Bands place boundary lines based on standard deviation, whereas envelopes place lines at fixed percentage points above and below a moving average line. The upper and lower limits specify entry and exit points for traders.

    But, instead of using them to indicate overbought or oversold conditions, we will attempt to create a narrow trading range and base the rules for this method on this narrow band. We will keep our settings for the Trading Bands as (40, 0.30).

    This means you have a band of two moving averages of 40, with a fixed percentage of 0.30 above and below. We then use another Exponential moving average with a setting of 15. The additional moving average is to help identify when the market is beginning to trend.

    The first rule is - do not enter a trade when the price is within the band. A trade is signaled only when the price moves outside the band. The general policy is to go long when the price is above the band, and to go short when the price is below the band.

    The second rule is for confirmation - don't trade when the 15 exponential moving average is flat. Only trade when the 15 exponential moving average starts rising or falling in the direction of the trade.

    This method keeps you out of the market when there is consolidation, which means more chances of getting whipsawed.

    The chart clearly shows that price was within the band for the first part of the chart and entering a trade here would have got you whipsawed. As a matter of fact, the EUR/USD was in a major uptrend on the daily charts at this time and this method gave us a precise point to enter the trade on a lower time frame.

    The red line is where the market was in consolidation. The market then began to rise slightly and the 15 exponential moving average also began to rise - this is the set up.

    Even though the market was set up for a trade, the safe play was to wait for 15 exponential moving average to start to trend and for the price to be well above the bands.

    The market then pulled back forming resistance. This resistance area is what we are looking for. A break of the resistance is the final confirmation that we have a high probability trade.

    The entry is made on a breach of the previous resistance with an initial stop just below the support area that formed.

    best regards
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  6. #6
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    Default

    In any market, the value of a currency traded tends to rise slowly over the longer term.

    Prices can and do spike quickly in the short term, but will normally return to the longer term moving average - which represents fair value.

    The standard deviation of the outer bands (how far they are from the mean) shows how far prices are from longer-term value.

    Most price spikes are caused by trader psychology with greed and fear to the fore and this can be graphically seen.

    So how should you use envelope.

    There are 3 main ways to use them.

    1. Spotting price spikes

    When the bands are a long way from the mean you can use Bollinger bands as profit taking signal on existing trades or use them to spot contrary trades.

    2. Enter exisiting trends

    If you have a good trend in the forex markets then you can use dips to the middle band to buy at fair value.

    3. Entering new trends

    When prices are trading in tight range and start to breakout with a change in volatility a great new trend could be emerging.

    best regards
    Last edited by broken trader; 07-29-2009 at 10:03 AM.
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  7. #7
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    Default

    i always follow the trends line to place my order without getting much into difficult things and conditions because it then makes it complicated and complex.
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  8. #8
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    Default

    Following trend lines makes trading more easy. But its not easy to draw trend lines, that is why most traders don't follow it
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  9. #9
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    Default

    You should use strips' break as identifiers of development of shift. In some cases, Moving Average Envelopes are used as filters.
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  10. #10
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    use trend line or horisontal line to use and identify support and resistance.it give no false signal
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