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Similar to Bollinger Bands , Range Envelopes are used to indicate the Trading Range of a given market above and below an Average Price. In this case , an Exponential Moving average is taken against the market, and then a trading band is applied by adding and subtracting a fixed percentage of the average on that day. e.g. We take a 15 Day EMA of the Market and then apply a 5% trading Band on the market. This will calculate the price 5% above and 5% below the average.
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Similar to Bollinger Bands except that no Statistical functions are performed. The Chart showsBHP with the Range envelope applied, with a 5% Upper/Lower deviation applied to a 15 day Exponential Moving Average. As we can see on the chart, when teh market is running slowly, or sideways, it resides comfortably within teh range, however when things quicken it starts to lag behind noticably and as such, this tool stops giving reliable readouts, and is less effective than it more powerful cousin the Bollinger Bands. Bearing this in mind, it should be used as a backup indicator only, and perhaps be used as a backup to the Bollinger Bands in the first instance. |
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