What are envelopes?

<p id="isPasted">There are different types of envelopes, but the most common one is the moving average envelope (MAE). It's created using a moving average (usually a simple moving average, SMA) as the central line, with upper and lower bands calculated based on a percentage or a fixed value added or subtracted from the moving average.</p><p><strong>Here's how MAE works:</strong></p><ul><li><p>Upper band:&nbsp;Calculated by adding a certain percentage (e.g.,&nbsp;2%) to the moving average.&nbsp;This line represents potential resistance,&nbsp;as the price is less likely to break above it for a sustained period.</p></li><li><p>Lower band:&nbsp;Calculated by subtracting the same percentage (e.g.,&nbsp;2%) from the moving average.&nbsp;This line represents potential support,&nbsp;as the price is less likely to fall below it for a sustained period.</p></li></ul><p><strong>Traders use envelopes for various purposes, including:</strong></p><ul><li><p>Identifying trading ranges:&nbsp;When the price stays within the envelope for an extended period,&nbsp;it suggests a range-bound market.</p></li><li><p>Confirming trends:&nbsp;Breakouts above the upper band or below the lower band can signal potential trend continuations.</p></li><li><p>Spotting overbought and oversold conditions: Price approaching the upper band may indicate overbought conditions, while approaching the lower band may indicate oversold conditions. However, it's crucial to use other technical indicators or chart patterns for confirmation to avoid false signals.</p></li></ul>