Envelopes indicator is a software assistant for a trader from a series of channel type indicators like Bollinger Bands. This instrument consists of three parallel moving averages with a single period and equal distance between them.
Envelopes indicator is interesting because it is a simple and universal trading instrument. This is effective assistant.
Indicator is able to easily integrate into various trading systems. Thanks to this feature, traders can apply this instrument both to work in low-volatile markets and when trading assets with high volatility.
Envelopes indicator on chart
How to launch and properly configure the instrument?
The platform user needs to perform the following actions to launch the Envelopes indicator in the IQ Option broker trading room:
- to call up the indicator menu by clicking the corresponding button in the lower left corner of the terminal;
- to select the category “Moving Averages”;
- to start the instrument.
The procedure for launching the Envelopes instrument
Indicator settings window will open, where the parameters are divided into basic and graphic blocks. In the basic settings, the user has access to such variables as: period, deviation, source, type of moving average.
Basic indicator settings
And in the “color and display” block, a trader can to set convenient graphical parameters.
Graphic settings of indicator
For beginners, it is better to leave the period 14 value unchanged, the type of moving average: SMA, and also the source for constructing the indicator: close. However, the deviation parameter must be configured depending on the timeframe on which the trader plans to work.
Deviation is 10 by default. This value works well on daily charts and is not suitable for trading with smaller timeframes. If this parameter is applied unchanged, then indicator will not be able to adequately respond to market changes on young charts.
Trader needs to empirically select its value and check the effectiveness to establish the correct deviation. It is recommended to multiply the initial shift value by a factor in the range from 0.5 to 0.005 and test the instrument on the demo account.
For example, for 30M candles, the optimal deviation value will be 1 (10 × 0.1 = 1), and for a 4 H chart, a deviation value of 5 (10 × 0.5 = 5) will do. Everything needs to be analysed and tested.
How to trade with the Envelopes indicator?
Experienced traders use three trading strategies with the Envelopes indicator depending on the style of work.
- Tactic for trade “breakthrough”. When the asset price has broken the upper line of the indicator and closed above it, then this is a signal to the trader to open a long position. And, when the candle broke through the channel and closed below the bottom line Envelopes, then trader must make a deal to sell. This impulse approach is effective in high volatility markets.
Opening a position on tactic “breakthrough” with the Envelopes indicator
- Strategy for trade “Bouncing prices from side lines of instrument”. It works best in low volatility markets. Movement of trend is not a requirement. The logic of strategy: when the price reaches the upper boundary of channel, the trader must sell the asset. And when the price comes to the bottom line of the indicator then a buy signal will be generated.
Entry points on tactic “Bouncing prices from side lines of indicator”
- Tactic for trade “Bouncing prices from the middle line of the indicator”. This strategy is relevant during trend movements with moderate volatility and lies in the fact that if during the downtrend the price has approached from the bottom to the middle line of the indicator, then the trader needs to sell the asset. And in an uptrend, when the price approaches the top of the Envelopes middle line, the trader must open a long position.
Entry points on tactic “Bouncing prices from the middle line of Envelopes”
Envelopes indicator is a multifunctional trading tool for determining current trends and turning points in the market. Due to the flexibility in the settings, this indicator works fine with all assets and on any timeframes. However, setting up the tool requires a certain time and effort to select the optimal parameters.
Beginners and experienced traders need to remember that before trading on Envelopes signals, be sure to test the indicator on training account. Otherwise there is a big risk of losing the deposit.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
GENERAL RISK WARNING