Hi David

I learned a lot from your videos. Recently I was viewing your video on Bollinger Bands and I was wondering if you can comment on another type of band called the Moving Average Envelope.

Regards
Ray

[David Waring]

Hi Ray,

Thanks for the comment I am glad you are learning a lot from our videos.

As you can see on our moving average resource page many traders use this indicator to confirm trends and to look for support and resistance levels in the market. In addition to this however some traders will also look at moving averages to determine how overextended the market is in one direction or another. The theory here is that prices tend to revert back to their mean (moving average) and therefore if price gets too far from a moving average then you can expect price to reverse and trade back towards the moving average.

To give a graphical pictures of where extreme levels may lay for potential reversal opportunities, some traders will add two lines which are a set percentage away from the moving average. As mentioned in John Murphy's book, Technical Analysis of the Financial Markets, common combinations are 3% envelopes on a 21 day moving average for shorter term trades, and 5% envelopes on a 10 week average or 10% envelopes on a 40 week average for longer term trades.

As you can see in our Bollinger Band resource page, the lines which encompass the moving average in this indicator are drawn using a set number of standard deviations from the moving average. Unlike in moving average envelopes where the bands are a fixed amount away from the moving average, because standard deviation is used, Bollinger Bands expand and contract around the moving average giving traders a picture of market volatility in addition to price extremes.

Has anyone had any successes with moving average envelopes? If so we would appreciate you sharing your experience with the community below.

Best Regards,
Dave