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Trading and Investment Terms

envelope

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.