Formed by two moving averages that define upper and lower price range levels. These averages are plotted certain percentages above and below the average price line in a trading chart. The purpose of an envelope is to dampen or help escape the effect of sharp price movements that can dislodge (whipsaw) traders out of their trading positions. When a price breaches either of the limits it might indicate the market is ripe for a movement in the opposite direction. Where these limits are placed depends upon the type of market, trading position, or market trend. Contra traders may use an envelope so that a sell signal occurs when price reaches the upper band, signifying an overbought market, and a buy signal occurs when price drops to the lower band, representing an oversold market.