Using Moving Average Envelopes

A chart set-up I often use but rarely show these days is a 6hr chart with moving average envelopes (bands).

The basic idea of the bands is to visually identify short term trend and to identify extreme moves of price where there is a high probability of a reversal. The best example of this right now is GBP/USD below where it is very clear that the bands provide support and resistance, particularly after quick sharp moves. Occasionally there is an overshoot but that’s trading and nothing is certain. This is simply a way of using price to determine an overbought/oversold situation rather than an indicator.

Another common feature is regular pullbacks to the “centre of the road” during a trending period as seen above in the second half of January. The dashed line on the 6hr chart is simply a 20SMA which on a daily chart would be a 5-day MA.

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The bands can also reveal when things really get moving. You’ll notice on EUR/AUD during late December and early January that the bands become steeper and narrower and that price just stuck to the bands. At times like this the move is too strong to reverse or even stall. Stand back if not on board. “Reversion to the mean” is difficult to trade when the “mean” is so dynamic.

EUR/AUD

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The bands are simply moving averages that are shifted up and down from the centre.

Why 6hr chart? No real reason other than one day I thought dividing the day into quarters might make more sense than dividing the day into sixths.

The view and trades are short term so last 3 months of data is enough. Together with a few simple trend lines and you can have a clear unobstructed picture of price.

A recent blog post by Blake Morrow (@PipCzar) dealt with a similar theme explaining rubber band theory and reversion to the mean can be read here.

Below are more charts (18 charts in total). Look at the ones that interest you the most if you think it’s all too much. 🙂

AUD/CAD

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AUD/USD

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CRUDE

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EUR/CHF – Even this lifeless pair conformed to the bands and to a simple parallel channel.

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EUR/GBP

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EUR/JPY

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EUR/USD

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GBP/AUD

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GBP/CAD

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GBP/JPY

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GBP/NZD

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GOLD

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SPX

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USD/CHF

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USD/CAD

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USD/JPY

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10c

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One thought on “Using Moving Average Envelopes

  1. Hi there: thank you for getting the time of creating up this knowledge. I usually make an attempt to even further my knowledge of facts. Regardless of whether I agree or disagree, I really like information and facts. I recall the olden times when the only source of advice was the library or the newspaper. They both look so old. : )

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