Envelopes and Methods of Price Containment
12.2 Adjusting Bands for Effective Price Containment
There are basically two main approaches for adjusting the bands to effectively
contain price action, namely:- By visual inspection
- By tuning to a dominant cycle
tuning by Visual inspection
Tuning or adjusting an envelope or band to effectively contain price by visual
inspection is by far the more reliable approach. This is because the bands
are adjusted with respect to actual price action over a certain period of
observation. Tuning by visual inspection automatically accounts for any domi-
nant cycles that may be present over the period of observation. It also accounts
for the average market noise that accompanies all cyclic activity in the market.
Tuning the bands visually involves adjusting the periodicity and sensitivity of
the bands until most of the price action is contained within the bands over
the period of observation. It should be noted that the periodicity and sensitiv-
ity may need to be re‐optimized after some time due to regime changes in the
market.tuning via half‐ and Quarter‐Cycle periodicities
Many practitioners also adjust bands with respect to some dominant cycle over
the period of observation. This is usually done by first isolating the periodicity
of a dominant cycle. The band’s lookback period is then set to its half cycle. The
quarter cycles are also employed, as we shall see shortly.Calculating the half‐Cycle period For example, let us assume that you have
isolated a dominant cycle and found that the average distance between cycle
troughs is 40 bars, or periods. Let N be the average cycle period. In this case,
N = 40. There are three ways to calculate the half‐cycle lookback period via any
of the following formulas:■ (^) (N+1)/2 and round up if N is even
■ (^) (N/2)+1 and round down if N is odd
■ (^) (2N+3)/4 round to closest integer
The last formula is advantageous from the perspective that you need not re-
member whether you are required to round up or down. Instead, you simply
round to the closest integer. The formula is derived by finding the average of the
first two formulas and will always yield a result that ends with either a 0.25 or
0.75, making it easy to round to the closest integer:
((NN+++=+++=+1 2)/ ( / ) ))/ (2 1 2 NNN 2 1 4 2 3 4)/ ( )/