Envelope indicator strategy
Hello dear traders, I continue with the 2nd Envelope indicator strategy for Bitcoin, which is again for M15 chart. And before I show you the strategy, I will just need to open another chart window, which I can do if I right-click over the Bitcoin in the Market Watch and I click on Chart Window.
A new chart opens and it has a totally different layout. But I can customize that as I’ve said if I go to properties,
and I can uncheck Show grid,
and as well for the colors, if I click on reset,
I will reset it to the black background, which I used on the 1st chart.
So if you want to save any of the layouts as a template, you can do that. Just go to Template, Save Template,
and you can name it however you wish. Then when you open a new chart, you will be able to switch to your favorite template quickly from your templates.
So I have already my black background template saved.
This is the one that I will be using. So the 2nd Envelope indicator strategy for Bitcoin is the EnDe, as I call it. I call it this way because of the entry Indicators, I use Envelopes and I use the DeMarker as confirmation.
How do the Envelopes work in this Envelope indicator strategy
So I just take the first 2 letters from both indicators, that is Envelopes and DeMarker, and I make it EnDe. This is just my own system of naming some of the strategies that I use so it’s easier for me to remember them and to apply them. The exit indicators are the Alligator in this case, and I have a Stop Loss of 70 USD and a Take Profit of 200 USD.
Very good risk-reward with this strategy and I will explain how it works. The 1st indicator that I will add is the Envelopes. I will go to Insert, Indicators, Trend, and I go to Envelopes.
The default value is 14 as a period.
I will change it to 11 and the deviation is 0.39. I click on OK.
You will see how the Envelopes indicator looks like.
These are 2 kinds of Moving Averages that go in parallel and usually the price stays between them. You will see that the price stays between the 2 bands of the Envelopes indicator and when there is volatility, it gets outside the bands.
This Envelope indicator strategy works on M15, something I forget to switch on the chart, so make sure to use it on the right timeframe. But no matter which timeframe you use with the Envelopes, you will always see that the price stays inside the Envelopes when there is no volatility and when there is volatility, it gets outside the bands.
The DeMarker in this Envelope indicator strategy
This is exactly what I will be using for this strategy. So with this strategy, we buy when the price gets outside the bands and it gets inside back.
Or to make it more precise, we say that we buy when the price gets outside, we see a bar opening above the upper band. And if we have a bar that opens below the upper band after that, this is our entry on the opening of the next bar, which confirms that there is a cross of the bands.
But we have one confirmation and this is the DeMarker, which must be higher than the level line. I will go to Insert, Indicators and the DeMarker is with the Oscillators. I click on it.
I will be using a period of 36 for the moment, and Levels of 0.75 above and below it will be 0.25.
I click on OK, and you will see how the DeMarker looks like.
The DeMarker must be higher than the level line which is 0.75. And in this example, you will see that we don’t have confirmation.
Because when we have a bar opening above the band and then we have another opening inside the Envelopes, this is the signal, but we need to see at the very same time that the DeMarker is above the level line, which in this case is below. So there is no confirmation.
I see the DeMarker above at some point but in this case, we don’t have a confirmation. Because with these candlesticks, we have a bar that opens outside the band.
But then the next one opens inside and the DeMarker is already below the level line. I want to show an example where we are actually buying and not selling.
I see that we have a confirmation with our Envelope indicator strategy. The price goes outside the Envelopes and at the same time, we have the DeMarker above the level line.
This is a signal to buy. Let me put 1 vertical and 1 horizontal line and you will see that at that moment, we have the DeMarker above the level line of 0.75, which is the confirmation.
I will make the horizontal line green because it’s a long trade or we buy at that moment.
What we will have for this Envelope indicator strategy is a Stop Loss of $70. I will put quickly 1 horizontal line 70 USD lower.
Sometimes I don’t calculate the cents. But in order to be precise, 10 634.78 minus $70, and that is 10564.78.
Then I will just right-click on the horizontal line properties and I will make the color red because this is a Stop Loss in this case. I will enter the value, which is 10564.78, and I click on OK.
The Alligator is a part of this Envelope indicator strategy
It gets on the right spot the very same way I am placing a Take Profit. Now it is red because I changed the color on the other horizontal line, but I will change it to green because this is our Take Profit and the parameters will be 10634.78 plus 200 USD.
That is very easy actually to calculate, 10834.78, and I click on OK. So here is the entry.
At this moment we have the signal from the Envelopes. The price gets outside and gets inside. We have a bar that opens inside the Envelopes.
So this is our entry at the very same moment that DeMarker is above the level line, which is confirmation. At the moment, when you open the trade, you need to put your Stop Loss and your Take Profit. So you’re protecting your capital and at the same time, you are ensuring profits if the price goes in your favor or in your direction.
Now, before we see what happens with this example that I just took very randomly on the chart, I will put the exit indicator, which is the Alligator. The Alligator is a very interesting indicator. I will look for it in Indicators, and I go to Custom.
It has Jaws, Teeth, and Lips.
Take Profit in this Envelope indicator strategy
It’s a very popular indicator and it has many strategies. But we will be using something very simple. So the values that I will be using is 20 for Jaws period and I have Shift of 18, and then I will use Teeth period of 18 and Shift of 8, and for the Lips, I will have period of 8 and Lips Shift 5, and I click on OK.
You will see another 3 lines over the chart.
The 2 lines on the top are the Envelopes that are parallel. The other 3 are crossing each other. The green one, if I put the mouse on that, is the Lips, the red line is the Teeth, and the blue one is the Jaws.
What we have as an exit rule for the long trade is the Lips crosses the Teeth downwards.
So when the green line crosses the red line downwards, we exit the trade, no matter whether it’s on profit or on loss. And the blue line, we don’t use it in this case, which is the Jaws. The price just goes sideways.
It touches the Take Profit exactly.
You can use any colors of your choice
The red line which is from the Envelopes indicator is parallel to the blue. I’m looking at the other red one. The green one crosses the red one.
Now, in order not to get confused, usually, I change the color of either the Envelopes or the Alligator. Now, because I’m used to the Alligator, what I usually do is change the color of the Envelopes to the same color. So I will take Aqua as well for the lower band, and when I click on OK.
I think it’s much easier because both bands for the Envelopes are blue and we have the green line from the Alligator and the red one.
We wanted to see that the green one is crossing the red line downwards. This happens at this moment as seen below.
The price hits the Take Profit
So we would be closing this trade at the level of 10 696, which is about $62 61, something higher. And we take a profit. If I don’t use the exit rule, what happens after that? The price goes up impulsively and we would have the Take Profit now.
It happens in trading that sometimes you will see the price getting very close to your Take Profit, but it will not hit it.
Sometimes it’s really just a couple of cents and it goes back. It can even go back to your Stop Loss, which is not really the best feeling. Let me zoom out the chart to show you, one more time, the example. We have the confirmation from the DeMarker, we have our entry, Take Profit, and Stop Loss.
Then I am following the Lips and the Teeth of the Alligator. For this Envelope indicator strategy, I want to see the green line crossing the red line downwards, which happens. We would close the trade on a profit. Then the price hits the Take Profit impulsively higher.
Each strategy has endless outcomes
So that’s quite an interesting example that I have selected because first, the price goes very close to the Take Profit, I really can’t say in 100% if that would close the Take Profit because it’s just touching it. But then it goes down back to the entry-level and then when we have the exit, the price goes to the Take Profit.
So when you start practicing, you will see that there are so many different outcomes for each strategy. Sometimes the Take Profit will be hit, sometimes the Stop Loss, sometimes the Take Profit is very close, but the price goes down.
And in this case, I always like to say that if I am in front of the screen and I see the price getting very close to my Take Profit, I will just close the trade manually and I will take my profit. Because anyway, there is always the risk that the price reverses and you lose the profit. But that’s up to you.
Usually, when I trade with the Expert Advisors or I trade these strategies manually, I don’t touch it. I’ll leave it to the Expert Advisor 100%.
These are the rules that we have for this strategy: 2 entry rules.
The exit in this Envelope indicator strategy
Indicators, I have 1 exit Indicator, and if we are selling, we are using just the very same thing on the opposite side. We want to see a bar that opens below the lower band, and then a bar opening inside the Envelopes. But at the same time, the DeMarker must be below the level line of 0.25.
In this case, let’s see where we have confirmation right over here. With this impulsive movement downwards, we have confirmation and let me remove all the lines. So you will see clearly here that the DeMarker is already below the lower band and the 1st bar that opens inside is right over here.
So at this moment, we would be Selling at about 10 628. And in this case, I think our Take Profit would be hit. $200 lower is at 10 427. The exit would be when the green line crosses the red line upwards, which in this case happens somewhere in here. This is the strategy in both directions.
When you want to buy, when you want to sell, you have the Envelopes as an entry, DeMarker as confirmation, Stop Loss of 70, Take Profit of 200. And these, one more time, are the values that I use for the current moment. And we have the Alligator, which is an exit Indicator.
Stay tuned for the next strategy
So as I’ve said, when I change the parameters in the strategies, I simply change the PDF for myself as well, and you will find it attached. So you will always know what are the current parameters that I’m using for these strategies.
Thanks for reading. I will continue with the next strategy, which is for Bitcoin on H1 chart, or that is for the 60 Minutes timeframe.
We’ll see you in the next lecture.