Envelopes (Env) is a technical indicator, usually formed by two moving averages that define upper and lower price range levels. Traders use this indicator to define extreme overbought and oversold conditions in the market. Besides, the envelopes may help to determine trading ranges for a particular trading instrument.
There are two moving averages: one of which moves upward and another one moves downward. Both are the basis of the indicator.
A moving average envelope calculates two moving averages using the high price and low price inputs. Both averages are calculated using price data from the same number of bars, as determined by the input length.
The indicator works in a similar way with other indicator called Bollinger Bands as two fervent dealers make the price move to the extremes. For example, the upper and lower bands point the prices, where they are often fixed, by moving to more optimum points.
Upper Band = SMA (Close, N)*(1+K/1000)
Lower Band = SMA (Close, N)*(1-K/1000)
SMA = Simple Moving Average.
N = Averaging Period.
K = The value of shifting from the average (measured in basis points)