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Envelope Model as a Price Filter

The envelope model serves as a price filter. It consists of a short-term (perhaps 5-day) closing price based moving average to which a small percentage (2 percent is suggested for foreign currencies.) are added and substracted.

The two winding parallel lines above and below the moving average will create a band bordering most price fluctuations.

When the upper band is penetrated, a selling signal occurs. When the lower band is penetrated, a buying signal occurs.

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Because the signals generated by the envelope model are very short-term and they occur many times against the ongoing direction of the market, speed of execution is paramount.

The high-low band is set up the same way, except that the moving average is based on the high and low prices. As a time filter, a short number of days may be used to avoid any false signals.

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