What is a major problem with using envelopes?

The primary issue with using envelopes lies in their inability to adequately account for the changing volatility of the underlying price. Envelopes are created by plotting lines above and below a moving average at a certain percentage distance, which assumes that this distance remains static over time. However, market volatility is dynamic and can vary significantly under different market conditions.

When volatility increases, prices may move away from the average more dramatically, leading to potential false signals due to the static nature of the envelope's boundaries. Conversely, in periods of low volatility, the enveloping lines may not adequately capture price movements, resulting in missed opportunities. For these reasons, traders may find that envelopes can lead to misleading buy or sell signals if they do not adjust for changes in volatility, ultimately affecting the effectiveness of the trading strategy.

Understanding this variability is crucial for traders utilizing technical indicators like envelopes, as they need to be aware of how market conditions can impact their signals and strategies.