Investing & Trading

Moving Average Envelope (MAE) Study

By Samantha Baltodano


TL;DR:

Moving Average Envelopes are two lines plotted a certain percentage above and below the moving average of security. Crossovers above the upper band indicate a security is overbought. Crossovers below the lower band indicate a security is oversold.


What Is the Moving Average Envelope (MAE) Study?

Moving Average Envelopes are two lines plotted a certain percentage above and below the moving average of security. 


For example, you might choose a 10-day SMA with envelopes set at 10% above and 10% below the moving average, as pictured in Figure 1.


Source: Think or Swim
Figure 1: 10-day SMA with envelopes set 10% above and below the moving average


Any moving average strategy can be used with this study including: Simple Moving Average, Exponential Moving Average, Weighted Moving Average, Wilders, and Hull. 


These envelopes are also referred to as trading bands, moving average bands, price envelopes, and percentage envelopes.



Buy and Sell Signals


Traders can interpret envelopes in many different ways, but most use them to define trading ranges. 


When the price reaches the upper bound of the envelope, a security is considered overbought, and a sell signal is triggered. 


When the price reaches the lower bound of the envelope, a security is considered oversold, and a buy signal is triggered. 


This method of trading is based on mean reversion principles.


Calculation


Center Band = n period moving average


Upper Band = Center Band * (1 + Envelope Percentage)


Lower Band = Center Band * (1 - Envelope Percentage)


Summary


Moving Average Envelope is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.


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