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The
moving average envelope 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
(10,50,0)
- Period
- the number of bars, or period, used to calculate the moving
average. FutureSource uses a default setting of 10.
- Percent
- 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%. FutureSource uses a default value of 50 for
50%.
- Show/Hide
Midpoint - this parameter is used to show or hide the
midpoint value for the bands. 0=hide, 1=show
Computing
the Envelope Moving Average
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 using the price
specified for that period. FutureSource
allows you to use the open, high, low, close, midpoint or
average price in the computation of the moving average. Additionally,
the moving average may be either a normal, smooth, or exponential
moving average.
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.
Remember,
the percentage value is in hundredths of a percent and is
a constant. Thus, a value of 300 is only 3 percent.
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