Moving average envelopes (MAE) are used as a tool to confirm trend direction, but can also be used in sideways markets to identify overbought and oversold levels.Every clip in Live can have its own clip envelopes. Whenever price traded near the lower envelope, the price would bounce back up. Observe how it acts as a strong support level. Whenever price traded near the upper envelope, the price would fall back down. Observe how the upper envelope acts as a strong resistance level. There is no strong bullish trend, nor is there a strong bearish trend. In the chart below, notice how the 30 SMA (orange line) and the upper and lower envelopes (blue lines) are flatвЂ¦almost horizontal even.Д®UR/JPY is directionless here. If price touches or rises above the UPPER envelope, then falls back below, sell. If price touches or falls beneath the LOWER envelope, then rises back above, buy. You should confirm overbought and oversold levels with support and resistance levels. This is why itвЂ™s best to pay attention to the slope of the moving average and make sure itвЂ™s flat. In a strong bearish trend, something can be technically oversold, but remain oversold for quite some time. Remember, a currency pair can become overbought and remain overbought when the bullish trend is strong. Identifying overbought and oversold levels isnвЂ™t easy though. When the price moves below the lower envelope, this can be considered oversold. When the price moves above the upper envelope, this can be considered overbought. When this happens, moving average envelopes can be used to identify overbought and oversold levels. This usually happens when the moving average slope is FLAT. There will also be times when the price initially moves above or below an envelope but turns back around. How to Identify Overbought and Oversold Levels with Moving Average Envelopes To confirm that the trend has changed from bearish to bullish, you could wait until the price has also closed above the upper envelope. See how the price managed to close above the moving average? In the chart below, notice how the 20-day simple moving average (orange line) and the upper and lower envelopes (blue lines) are moving higher. If the price closes below the LOWER envelope, sell. If the price closes above the UPPER envelope, buy. If the price plunges below the lower envelope, this is considered bearish. Since trends often begin with a strong move, if the price surges above the upper envelope, this is considered bullish. You should pay attention when the price moves above or below the envelopes. The trend is neutral and the price is considered directionless. When the envelopes are moving sideways, the price is neither in an uptrend or downtrend. When the envelopes are moving lower, the price is in a downtrend. When the envelopes are moving higher, the price is in an uptrend. The direction of the moving average determines the direction of the envelopes. Since the foundation of moving average envelopes (MAE) is the moving average, this means that the moving average envelopes can be used as a trend-following indicator. How to Confirm Trend Direction with Moving Average Envelopes They remain a constant 1% above and below the moving average (orange line). Notice how the envelopes (blue lines) move parallel with the 10-day SMA (orange line). The chart below shows EUR/USD with a 10-day SMA and 1% envelopes. 01)ДЎ0-day SMA Lower Envelope: 10-day SMA - (10-day SMA x. Lastly, set the percentage value youвЂ™d like to use for the envelopes.ДЇor example, a 10-day moving average with a 1% envelope would show the following lines: Upper Envelope: 10-day SMA + (10-day SMA x. Then, select the number of time periods you wish to apply. Remember, EMAs have less lag because they put more weight on recent prices. How to calculate a moving average envelope is pretty simple. How to Calculate Moving Average Envelopes Identify overbought and oversold conditions.ItвЂ™s called an envelope (noun) because these two lines envelope (verb) the original moving average line. Together, these two lines form an upper and lower envelope. One line is ABOVE the moving average and the other line is BELOW the moving average. What are Moving Average Envelopes?ДЄ moving average envelope consists of a moving average AND two other lines. This is where moving averages envelopesВ (MAE) can help. Wait for more confirmation that the trend is legit.Go long now based on the original entry signal (price closed above MA).So assuming you still want to go long, you have two options: How do you know that this bullish trend is вЂњrealвЂќ and will continue? For example, letвЂ™s say EUR/USD is moving upward and closes above a moving average, signaling an entry to go long.

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