Why are envelopes used in trading?

Envelopes are particularly useful in trading as they provide a method of defining the boundaries in which a price typically moves. By applying envelopes around a moving average, traders can create a relative measure of the price's behavior. This helps filter out false signals that may arise from simple moving average crossovers.

The idea behind using envelopes is to avoid trades that do not align with the trend or that fall outside of the expected price range. For instance, when the price breaks above the upper envelope, it may indicate a potential buying opportunity, while a breach below the lower envelope could suggest a selling opportunity, thereby enhancing the likelihood of entering profitable trades. By using this approach, traders can effectively minimize the chances of entering trades based on less reliable signals from simple moving average crossovers, which can sometimes produce unprofitable trades, especially in volatile or sideways markets.

In summary, the primary purpose of envelopes is to serve as a filter, assisting traders in determining more reliable entry and exit points by reducing the impact of false signals.