Envelopes are gdrawn on the chart by applying two moving averages on high and low of price candle range. This way, we acquire information on overbought/oversold zones, but also current trend and price range.
Anatomy of envelopes forex indicator
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Both envelopes are calculated using same method but applying it separatelly on high and low price. Input of Envelopes indicator is based on number of closed candles we wish to include in our calculations. Envelopes are smoothing the price in similar fashion as MA (Moving average) forex indicator. By using same method, and applying it on highs and lows we can better understand range of the market within trend.
Using envelopes forex indicator
Envelopes can be used as overbought/oversold signal. Crossing one of the lines is not sufficient as standalone position entry signal. It is useful to connect envelopes with chartist analysis of candle formation.
For example pin bar candle appearing outside of envelopes borders can signalise imminent price reversal.
Oscillators (for example RSI and Stochastic) can also be used to further confirm overbought and oversold market.
Envelopes can be used to find good position for stop loss. By averaging low and high price simultaneously at all the times, this forex indicator gives trader very accurate idea on where to place protective stop loss.