The envelopes indicator is a straightforward indicator that you can use to find trading signals and also to manage your trades.
In this post, we go through exactly what the envelopes indicator is, how to use it in your trading and how to use it in your MT4 and MT5 charts.
NOTE: Want a full list of some of the best free MT4 and MT5 indicators you can use in your trading? You can get them below.
Table of Contents
What is the Envelopes Indicator?
The envelopes indicator is a simple indicator that shows you trends and potential price breakouts.
The envelopes indicator is created with two moving averages or bands as they are commonly referred to.
These moving averages then give you upper and lower bands. See the chart below for an example.
The calculation to form the envelopes indicator is as follow;
- Upper envelope = SMANx X [1 + D%]
- Lower envelope = SMANx X [1 – D%]
D is a deviation value, and N is the number of periods we choose to use for the averaging.
You can change how far these upper and lower bands should be away from each other. In the indicator settings, you will be given the percentage that you want these moving averages to deviate. A more significant deviation percentage will increase how far the two moving averages are away from each other.
Envelopes Indicator Strategy
Using the envelopes indicator for your trading strategies is very straightforward.
The two main ways traders use this indicator are as a trend trading indicator and a breakout indicator.
Trend Confirmation With the Envelopes Indicator
The idea of the moving average is to smooth out overall price action fluctuations. This helps you find when a trend is moving higher or lower with a clean moving average on your charts.
With the envelopes indicator, you can quickly and easily identify when the price is in a strong trend or price action is consolidating in a range.
Have a look at the chart example below. To start with, price is clearly in ranging and consolidation mode. We can quickly see this as the bands of the envelopes are moving sideways and not higher or lower.
After price breaks higher, the bands quickly move to point higher, showing us a strong trend higher in place.
We can use this information to our advantage by either playing range or trend trades depending on what the envelopes bands are doing and how they are moving.
Breakout Trading With the Envelopes Indicator
Seeing how price interacts with these two bands can help us find trend trades and potential breakout trades.
After a period of consolidation or ranging, the price action will make a breakout.
In the same chart example below, we see that price was trading sideways and with no clear trend.
Price then breaks and significantly closes above the upper envelopes band. This could be a trigger to start looking for breakout trades higher. This indicates that the price is looking to enter a new trend higher, which we could use to our advantage.
Another important note is how the price moves after making this breakout. After breaking out, the price stays very close to the upper band, indicating a strong trend higher is in place.
We can use this information to find both trend trades and breakout trades.
Envelopes Indicator for MT4 and MT5
Handily enough, the envelopes indicator is built right into your MT4 and MT5 charts, and there are no custom indicators required to download or install.
To start using the envelopes indicator on your charts, just do the following;
- Open your MT4 or MT5 charts.
- Navigate to “Insert” >> “Indicators” >> “Trend” and lastly “Envelopes”.
- A box with settings for the indicator will pop up.
- Choose the color for your envelopes bands and also the deviation period.
- Select “Ok,” and the indicator will be added to your chart.
As we have just gone through, the envelopes indicator is a super easy indicator you can start using in your trading today.
While the envelopes indicator can be used by itself, it is always recommended you use other trading tools and indicators to increase the accuracy of your trades. These could include things like technical analysis and your favorite indicator.