Envelopes Indicator for MT4

September 9, 2021

1498

Introduction to the Envelopes Indicator

One of the types of indicators that traders use to identify overbought and oversold markets is the band, channel, or envelope type of indicator. The most popular among these is the Bollinger Bands. The Envelopes Indicator is another band type indicator which can also be used to identify overbought and oversold price levels.

What is the Envelopes Indicator?

The Envelopes Indicator is a band-based or envelope type of indicator which plots lines that should typically envelope price action.

This indicator plots two lines. It plots a blue line which represents the upper bounds of the normal price action range and a red line which represents the lower bounds of the same range. These two lines should typically envelope price action between them except for market conditions which have very strong momentum.

How the Envelopes Indicator Works?

The Envelopes Indicator begins its computation with a daily Simple Moving Average (SMA). It then multiplies the same SMA line with a multiplier which would then be subtracted and added from the main SMA line. This would then shift the lines above and below the underlying SMA line enveloping price action.

This version of the Envelopes Indicator has preset the number of periods used to a 14-bar period. However, the most common periods used is a 50 SMA line. Users can also adjust the deviation multiplier to widen or contract the Envelopes range.

How to use the Envelopes Indicator for MT4

The Envelopes Indicator has several variables which allows users to tweak the lines it plots.

“MA Period” refers to the number of periods used on the moving average line.

“Deviation” refers to the multiplier used by the indicator.

“MA Method” allows users to change the type of moving average used instead of the SMA line.

“Applied Price” allows users to change the source of the price data instead of the close of a bar.

“MA Shift” shifts the lines forward or back.

The Envelopes Indicator is a mainly a marker for overbought and oversold price levels. Price which is above the upper line is indicative of an overbought market, while price which is below the lower line is indicative of an oversold market. Traders can use this indicator to trade mean reversals based on a reversal pattern developing on these levels.

Buy Trade Setup

When to Enter?

Open a buy order as soon as a bullish reversal candlestick pattern develops on the lower Envelopes line. Set the stop loss below the pattern.

When to Exit?

Close the trade as price action reaches either the middle of the Envelopes range or the opposite upper line.

Sell Trade Setup

When to Enter?

Open a sell order as soon as a bearish reversal candlestick pattern develops on the upper Envelopes line. Set the stop loss above the pattern.

When to Exit?

Close the trade as price action reaches either the middle of the Envelopes range or the opposite lower line.

Conclusion

The Envelopes Indicator can be an excellent tool for trading mean reversal setups. However, it does need to be adjusted based on the characteristics of the currency pair as well as its price range.

Traders who can identify a suitable setting for a currency pair can use this indicator for mean reversal setups successfully.