Envelopes and Methods of Price Containment
Calculating the Quarter‐Cycle period To find the quarter‐cycle period for an
average dominant cycle of N periods, we use (N+1)/4 and round to the closest integer,
or round up to the next integer if the value falls on a 0.50 decimal or higher. We shall
be focusing on the application of quarter‐cycle lookback periods in a later section.12.3 Methods of Price Containment
There are basically five approaches to contain price. Let us now focus on each
price containment indicator’s character and behavior.Fixed Value bands
Fixed value bands comprise any moving average with upper and lower bands that
are at equal dollar or point value distance from the central moving average. They
are not as popular as the fixed percentage bands for two reasons:- Fixed value bands cannot adapt to market volatility and as such will give
many false buy and sell signals during periods of increased volatility. - They cannot adapt to the larger ATR values at higher prices and will require
frequent re‐optimization to account for the wider bars.
relative Value bands
Fixed percentage moving average bands are the popular form of price containment.
Market participants use them to indicate trend, potential support, and resistance
and as a trigger for initiating buy and sell positions. Entries may be executed via
any of the three approaches, that is, via breakouts, reversal entries, or reversalFigure 12.11 Tuning the Fixed Percentage Bands to the Dominant Half-Cycle Period
on the 4‐Hour Chart of GBPUSD.
Source: MetaTrader 4