The EMA Envelopes are plotted as two lines that are offset from the EMA by a certain percentage. The upper line is typically plotted a few percentage points above the EMA, while the lower line is plotted a few percentage points below the EMA. Traders may use them to identify potential buy or sell signals when the price of an asset moves above or below the upper or lower envelope lines. For example, a trader might enter a long position when the price of an asset moves above the upper envelope line and exit the position when the price falls below the EMA. The EMA Envelopes can also be used to identify the strength of a trend. A strong uptrend is indicated when the price stays above the upper envelope line for an extended period. In contrast, a strong downtrend is indicated when the price remains below the lower envelope line for an extended period.
Envelopes (Trading Bands) - Technical Analysis from A to Z
An envelope is comprised of two moving averages. One moving average is shifted upward, while the second is shifted downward. Envelopes define the upper and lower boundaries of a security's normal trading range. A sell signal is generated when the security reaches the upper band, whereas a buy signal is generated at the lower band. The optimum percentage shift depends on the volatility of the security - the more volatile, the larger the percentage.
Bollinger Bands - Technical Analysis from A to Z
Bollinger Bands are similar to moving average envelopes.
The basic interpretation of Bollinger Bands is that prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During extreme price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e., low volatility), the bands narrow to contain prices.
Envelopes (Trading Bands) - Technical Analysis from A to Z