Envelope Channel

Percentage envelopes are one of the oldest constructions in technical analysis. The familiar form wraps a moving average — boundaries at a fixed percentage either side, on the reasoning that price spends most of its time within a predictable proportional distance of its own average, and that excursions beyond it are worth a second look. This tool is the hand-placed version: the centre is a trend line you chose, not an average.

The reason to draw it that way is that a percentage is the unit price actually moves in. A stock does not rise by a constant number of currency units per year; it compounds. So a band that means “5% either side” keeps describing the same thing over a long span, while a band fixed at some absolute distance quietly becomes a different statement about the market every month.

That also makes this the one channel here that is correct by construction on alogarithmic price axis, where equal percentages are equal screen distances. On a log axis its boundaries stay visually parallel to the base line at any zoom. Every constant-price channel visibly fans on the same axis, because a fixed price offset is a shrinking proportion as price climbs.

The tool takes 2 clicks: drag the base line between the two points the trend runs through. The boundaries appear immediately at the default ±2%, and the base line is drawn as the channel’s centre line.

The width is a property, not a drag handle. There are two grips, one at each end of the base line, and no third grip for the width — set it with the Envelope control in the properties panel. This is deliberate: the value is a proportion, so a drag grip would have to map pixels onto percent, and that mapping changes with the zoom level and the price scale. The ATR Channel and the Regression Trend resolve the same problem the same way. It also means the stored record needs no conversion when the axis changes, which is exactly the property that screen-pixel widths lacked.

Each boundary end is computed from its own end’s price and then converted to a screen position independently. Offsetting the drawn line by a pixel amount instead would put the boundary at the wrong price at one end on a logarithmic axis — the percentage is a different number of pixels at each end by definition.

Because both anchors carry a real price and time, the envelope tracks the pivots it was placed on through zoom, pan, timeframe changes and log-axis toggles.

Mean reversion inside the envelope: in a market that respects the band, a touch of the upper boundary is a candidate short and a touch of the lower a candidate long, with the base line as the first target. The percentage is what makes the setup comparable across instruments — a 2% excursion means roughly the same thing on two very different-priced assets, where a fixed-distance channel would not.

Trend-following with a proportional stop: the lower boundary of a rising envelope is a natural trailing stop that widens as price advances. Because the distance is proportional, the stop keeps the same percentage risk per unit as the position grows in value, instead of tightening in relative terms the way a fixed-distance channel does.

Excursion measurement: set the envelope so both boundaries just contain the normal swings, then treat a close outside as a genuine outlier rather than a routine oscillation. The percentage that achieves that containment is itself a useful figure — it is a rough measure of the instrument’s trend-relative volatility, comparable across assets.

1. 1
   Find the trend

   Identify the line price has been advancing or declining along. This becomes the centre of the envelope, so it should sit through the middle of the swings rather than along one edge.
2. 2
   Drag the base line

   Click the first point and drag to the second. The boundaries appear at the default 2%.
3. 3
   Set the percentage

   Open the properties panel and adjust Envelope until both boundaries sit where price has actually been turning. This is the tool’s only sizing control.
4. 4
   Check it on a log axis

   Switch the price scale to logarithmic. The boundaries should stay parallel to the base line — confirmation that the width is proportional and not a fixed distance.
5. 5
   Extend to project

   Set Extend to Right to carry the envelope forward, and read the Band figure to see what the percentage currently amounts to in price.

• The band widens in price terms as price rises and narrows as it falls, on a linear axis. That is correct behaviour, not distortion.
• A percentage that contains the swings on one instrument may be far too tight or loose on another. The number is instrument-specific and worth recording alongside the drawing.
• Repeated closes outside the envelope mean the percentage is too small for the current regime, or the trend has changed and the base line no longer describes it.
• Price hugging one boundary for an extended stretch usually means the base line’s slope is wrong, not that the envelope is.
• The Band readout is the practical figure for position sizing: it converts the percentage into the currency distance a stop would actually sit at.

Comparing volatility across instruments: draw an envelope on each of several instruments over the same period and adjust each until the boundaries just contain the swings. The percentages are then directly comparable in a way absolute channel widths never are, which gives a quick relative-volatility ranking without computing anything.

Nested envelopes: place two envelopes on the same base line at different percentages — say 2% and 5%. The inner band marks routine oscillation and the outer marks genuine excursion, giving a two-tier read on how far price has stretched without needing a statistical measure.

Long-horizon channels: on multi-year charts this is the only channel in the family that stays meaningful end to end. A percentage envelope drawn across a period in which price doubled still describes the same proportional band at the end; a constant-width channel drawn to the same starting size is describing roughly half the relative band by then.

• 1.Envelope (technical analysis) — Investopedia
• 2.Moving Average Envelopes — Investopedia
• 3.Technical Analysis of the Financial Markets — John J. Murphy
• 4.Technical Analysis Explained — Martin J. Pring
• 5.Logarithmic vs. linear price scales — Investopedia