Envelopes: Bands Around a Moving Average

Envelopes are the simplest possible channel: a moving average with a fixed percentage offset above and below. The difference from Bollinger Bands is fundamental — here the channel width is set by hand and does not respond to the market.

The Envelopes indicator: how the bands are built

Take an N-bar average and offset it by a given percentage in both directions. That is all. Neither volatility nor range enters the calculation, so the channel keeps a constant relative width whether the market is quiet or violent.

How often it signals on real data

We ran the rule "price outside the SMA(20) ± 0.5% envelope" over daily bars for 12 currency pairs — 518 bars each, about two years. We counted frequency rather than profit: how often the state changes and what share of days the indicator spends in signal.

• State changes over the period: 109 (median across pairs)
• Annualised: 55
• Share of days in signal: 64.4%
• Sample: 12 pairs, 518 daily bars

The measurement is reproducible: the script and data are in the site's repository and the conditions are described in the methodology. Frequency is not return: it says only how often you will have to make a decision.

What that measurement means

The figure of 64% is not a property of the indicator but a diagnosis of the setting. Half a percent is far too narrow for daily bars: price ends up outside the envelope more often than inside, and the channel stops bounding anything. This illustrates the main weakness of Envelopes — the percentage has to be chosen by hand for every instrument and every timeframe.

Where Bollinger is better and where it is worse

Bollinger Bands solve the same problem but take their width from standard deviation, so they adapt on their own. That is almost always preferable. The single advantage of envelopes is predictability: their boundaries do not widen after a strong day and so do not suppress signals the way an adaptive channel does.

Choosing the percentage honestly

There is a method that does not reduce to curve fitting: pick the share of days you want price to spend outside the channel and solve the inverse problem. If you want roughly 5%, measure what percentage delivers that on history and fix it. The parameter is then determined by an external condition rather than by trading results. For daily bars on the majors this is usually 1.5–2%, three to four times the unfortunate 0.5% in our measurement, and it has to be checked per pair — their volatility differs noticeably.

When envelopes make sense

In two cases. When you need a fixed rather than floating reference — for instance to express deviation from a fair value in percent. And on instruments with stable volatility, where adaptiveness buys nothing. In every other situation an adaptive channel is the more practical choice.

This material is for educational purposes and is not individual investment advice.