How to easily recognise chart patterns

## Moving Average Envelopes: A Popular Trading Tool

Effective internet earnings, they are prone to giving false signals in choppy markets. By applying an envelope to the moving average, some of these whipsaw trades can be avoided, and traders can increase their profits.

Envelopes trading has been a favorite tool among technical analysts for years, and incorporating that technique with MAs makes for a useful combination. What Is an Envelope?

Moving averages are among the easiest-to-use tools available to market technicians. A simple moving average is calculated by adding the closing prices of a stock over a specified number of time periods, usually days or weeks. As an example, a day simple moving average is calculated by adding the closing prices over the last 10 days and dividing the total by The process is repeated the next day, using only the most recent 10 days of data.

### The Cool Cone

The daily values are joined together to create a data series, which can be graphed on a price chart. This technique is used to smooth the data and identify the underlying price trend. Learning to analyze charts can be a big help when making trading decisions. Check out the Analyzing Chart Patterns tutorial to learn how. Figure saw in trading buy signals occur when prices close above the moving average; sell signals occur when prices fall below the moving average.

### Point n Figure - The KING of all charts

Figure 1 indicates with the large arrows show winning trades, while the smaller arrows show losing trades when trading costs are considered. Figure 1: The monthly chart of Starbucks shows that a simple moving average crossover system would have caught the big trends Source: TradeNavigator Drawbacks of Envelopes The problem with relying on moving averages to define trading signals is easy to spot in Figure 1.

While the winning trade shown in that chart was very large, there were five trades that led to small gains or losses over a five-year period. It is doubtful that many traders would have the discipline to stick with the system to enjoy the big winners. For related reading, see Patience Is a Trader's Virtue.

To limit the number of whipsaw trades, some technicians proposed adding a filter to the moving average. They added lines that were a certain amount above and below the moving average to form envelopes. Trades would only be taken when prices moved through these filter lines, which were called envelopes because they enveloped the original moving average line.

## The Utility Of Trendlines

Source: TradeNavigator In theory, moving-average envelopes work by not showing the buy or sell signal until the trend is established. In practice, what they did was raise the whipsaw line; as it turned out, there were just as many whipsaws, but they occurred at different price levels.

Learn how a change in market direction can be your ticket to big returns in Turnaround Stocks: U-Turn to High Figure saw in trading. Another drawback to using envelopes in this way is that it delays the entry on winning trades and gives back more profits on losing trades.

### 11 essential stock chart trading patterns

Making Envelopes Work Better The goal of using moving averages or moving-average envelopes is to identify trend changes. Often, the trends are large enough to offset the losses incurred by the whipsaw trades, which makes this a useful trading tool for those willing to accept a low percentage of profitable trades.

However, astute market observers noticed another use for the envelopes. Most of the time, when prices touch the envelope lines, prices reverse.

### Outlook for trade in 2019 and 2020

But there are some times when they continue trending, leading to losses. Figure 3: Wider envelopes are useful for spotting short-term trend reversals. Source: TradeNavigator Among the earliest proponents of this countertrend strategy was Chester Keltner. In his book, "How to Make Money in Commodities," he defined the idea of Keltner bands and used slightly more complex calculations.

Instead of using the close to find his moving average, he used the typical price, which is defined as the average of the high, low and close.

## Can day-traders influence stock prices?

Instead of drawing fixed-percentage envelopes, Keltner varied the width of the figure saw in trading by setting it to a day simple moving average of the daily range which is the high minus the low. This method is illustrated in Figure 4. Figure 4: Keltner bands contain most of the price actionand short-term traders may find them useful as a countertrend system. Source: TradeNavigator Buy signals are generated when prices touch the lower band, represented by the green line in Figure 4.

While Keltner bands are an improvement over the set-percentage moving-average envelope, large losses are still possible.

As can be seen on the right side of the chart, the last time prices touched the lower envelope in this chart, they continued to fall. A simple stop-loss would prevent losses from growing too large and make Keltner bands, or a simpler moving-average envelope, a tradable system with profit potential for traders on all time frames.

All traders can benefit from experimenting with these technological tools. Compare Accounts.