HOLLOW POINT TRADING
What Are Moving Average Envelopes?
Moving Average Envelopes consist of a moving average with two bands plotted at a fixed percentage above and below it. These bands create a channel that contains most price action, with touches of the upper or lower band signaling potential reversal opportunities.
Unlike Bollinger Bands which use standard deviation, envelope bands maintain a constant percentage distance from the moving average regardless of volatility.
How They're Calculated
Middle Line: A simple or exponential moving average (commonly 20 periods)
Upper Band: MA + (MA × Envelope Percentage)
Lower Band: MA - (MA × Envelope Percentage)
Common percentage: 2.5% for stocks, varies by asset volatility.
Trading Strategies
Mean Reversion
Buy: Price touches lower band → Anticipate bounce to MA
Sell: Price touches upper band → Anticipate pullback to MA
Best in: Range-bound markets
Breakout Trading
Bullish: Close above upper band + volume → Enter long
Bearish: Close below lower band + volume → Enter short
Choosing Settings
Percentage Guidelines
- Low volatility stocks: 1-2%
- Average stocks: 2.5-3%
- Volatile stocks: 4-5%
- Forex majors: 0.5-1%
- Crypto: 5-10%
Key Takeaways
Moving Average Envelopes identify when price is extended from its average. Calibrate the percentage to your asset's volatility and use them for mean reversion or breakout trading with additional confirmation.