The moving average envelope chart study is a derivative of the moving average study. It uses only one moving average, which you specify. You also determine the price band. The price band has two lines which are an equal percentage distance from the exponential, smoothed, or normal moving average. The moving average line is not visible. While several different trading rules are available, the most simple approach uses the price band as an entry and exit point. When price penetrates the upper price band, you initiate a long position or buy. If you have an existing short position, you close out shorts and go long. Conversely, when prices penetrate the lower price band, you close out long positions and go short.

In Kaufman's book, Commodity Trading Systems and Methods, he suggests several other approaches. They are as follows:

• Buy or sell on the close after a signal is indicated.
• Buy or sell on the next market open following a signal.
• Buy or sell with a delay of 1-3 days after the signal.
• Buy or sell after a price retracement of 50% (or some other value) following a signal.
• Buy or sell when prices move to within a specified risk relative to a stop-loss point.

In the case of using the moving average envelope on intraday prices, Kaufman suggested the following rule. "Only one order can be executed in one day, either the liquidation of a current position or an entry into a new position."

Kaufman's book is an excellent source and reference. While it is definitely written for a mathematically inclined individual, a novice trader would benefit from several of the chapters, especially the chapters on moving averages, oscillators and technical analysis.

Parameters:

• Period (10) - the number of bars, or period, used to calculate the moving average.
• Percent (50) - a percentage value (1/100) for the price band. A value of 30 indicates 30/100 or 30%, a value of 5 indicates 5/100 or 5%.
• Show/Hide Midpoint (0) - this parameter is used to show or hide the midpoint value for the bands. 0=hide, 1=show

Computation

The FutureSource software system first computes the moving average. It then computes the percentage band around the moving average. The formula follows:

Mat = (P1 +... + Pn) / n

• Mat is the moving average.
• Pn is the price for the nth interval.
• n is the length of the moving average.

FutureSource computes the average of the past n intervals.

The software requires you to input a percentage value for the price band in hundredths of a percent. Using that percentage figure, the computations are as follows:

UBt = Mat + (Mat * %P)
LBt = Mat - (Mat * %P)

• UBt is the upper price band.
• LBt is the lower price band.
• Mat is the moving average for the current interval.
• %P is the percentage value for the price band.