Moving Average Envelope Exponential
Indicator Type: Overlay - Interactive Charts Only
The Price Envelope study (sometimes referred to as "Envelope") is a derivative of the moving average study. It uses only one exponential moving average. You also determine the price band.
The price band has two lines which are an equal percentage distance from an exponential 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."
Sample Chart:
Default Parameters
Period (10) - the number of bars, or period, used to calculate the exponential moving average.
Range (3) - a percentage value for the price band. A value of 3 indicates 3/100 or 3%, a value of 5 indicates 5/100 or 5%.
Computation
An exponential moving average (EMA), sometimes also called an exponentially weighted moving average, applies weighting factors which decrease exponentially. The weighting for each day decreases by a factor, or percentage, on the one before it.
The indicator first computes the exponential moving average. It then computes the percentage band around the moving average.
The software requires you to input a percentage value for the price band in hundredths of a percent. Using that percentage figure, the computations are as follows:
UBt = Mat + (Mat * %P)
LBt = Mat - (Mat * %P)
UBt is the upper price band.
LBt is the lower price band.
Mat is the moving average for the current interval.
%P is the percentage value for the price band.