In a nutshell, a moving average envelope is a technical analysis indicator that shows lines above and below a moving average. The ultimate goal of using moving averages is to identify trend changes in the market. Though moving averages are a useful tool as part of the technical analysis tools set, might also provide false signals.
When it comes to moving averages, a simple buy signal occurs when prices close above the moving average and a sell signal occurs when the price closes below the moving average. For example, if EUR/USD is moving upward and closes above a moving average, signaling an entry to go long.
How do you know that this trend is happening in real and will keep continuing? The answer is, you don’t.
If you assume that the trend will go long, there are two options: Either to go long based on the original entry signal or wait for more confirmation that the trend is legit. This is where moving averages envelopes (MAE) can help.
Basically, a moving average envelope consists of a moving average and two other lines. While one line is above the moving average, the other line is below it. Together, these two lines form an upper and lower envelope. It’s called an envelope as these two lines wrap the original moving average line.
Moving averages envelopes are used to confirm trend, as well as to identify overbought and oversold conditions.
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