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Moving Average Envelopea fixed percentage, on purpose

Evidence: WeakBeginnerMean reversion · Envelope

An envelope is a moving average with a fixed percentage band around it — not a standard deviation, not an ATR multiple. A half-percent envelope is half a percent whatever volatility is doing.

Every other band in this book adapts. This one deliberately does not, and that is both its weakness and its use: an adaptive band widens during a volatile stretch and stops signalling exactly when the moves are largest. A fixed envelope keeps signalling — more trades, and worse ones, precisely when it matters most.

The evidence here is for reversion itself, not for this particular measure of it. The ruler below is a way of deciding when price has stretched far enough — it is not what makes it come back.

Category
Mean reversion · Envelope
Timeframe
H1 primary · H4 for context
Suitable pairs
EURUSD · USDCHF — low-volatility majors, where a fixed band is closest to sensible
Session
London and New York
Indicators / tools
SMA(50) with a ±0.35% envelope · ATR(14) for the volatility check

Valid setup

MR-11 · MOVING AVERAGE ENVELOPE — VALID SETUP USDCHF · H1 · the fixed envelope against an adaptive band — see where the two disagree LONG 0.87780 0.87916 0.88051 0.88187 0.88322 0.88458 0.88593 to the mean 1R Bollinger, for comparison SMA(50) ± 0.35% — fixed, whatever volatility does TARGET = SMA(50) ENTRY STOP 1 2 3 4 0.88171 0.88084 0.88000 ① ATR within 1.3 × its own 100-bar average — the check that matters ② A candle closes below the fixed envelope ③ Note the grey band: it adapted, the blue one did not ④ Next candle closes back inside — enter at that close ⑤ Fixed band, adaptive stop — deliberately mismatched ⑥ Target the SMA(50)

Exact rules

Entry

  • Volatility check first: current ATR(14) within 1.3 × its own 100-bar average. Outside that, the fixed band is meaningless and there is no trade.
  • Setup: a candle closes below the lower envelope — SMA(50) × 0.9965.
  • Trigger: the next candle closes back inside. Enter at that close.
  • Re-fit the percentage each quarter against realised volatility. A band set last year is not the right band today.

Stop loss

  • Below the excursion low, plus 0.4 × ATR(14).
  • Note the mismatch: the band is fixed and the stop is adaptive. That is deliberate — the stop has to survive the volatility the band ignores.
  • Risk 0.5%.

Take profit / exit

  • The SMA(50).
  • Time exit after ten bars.
  • No trailing.

Build Moving Average Envelope

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More from Mean reversion

RSI(2) Extremesthe short-period oscillatorBollinger Band Fadetwo standard deviationsZ-Score Reversionthe distance, stated plainly

Trading carries risk and most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade. The chart is an illustration of the rules on constructed candles — it is not a record of a trade and not a backtest.