Envelopes in technical analysis are two lines used to measure the trading range of a security, with the upper and lower bands representing points at which the market has had an increased level of resistance or support. By plotting the upper and lower points, investors can identify potential price targets and determine whether the current price of the security is trending above or below the average.

By combining the upper and lower bands with other technical analysis tools, traders are able to generate buy and sell signals as the price either reaches or crosses the upper or lower band of the envelope channel. Generally, when the price crosses the upper band, traders view it as a sell signal, and likewise, when the price crosses the lower band, a buy signal can be activated. Further, by plotting the envelope channel, investors and traders are able to measure a security’s volatility, allowing for more accurate entry and exit points when trading within the range.

The upper and lower lines of the envelope channel can be created using a variety of different methods. Generally, they are either generated by a simple moving average, or they may be plotted as a percentage distance above and below the moving average. Occasionally, they are generated with a more sophisticated technical indicator such as the Bollinger Bands. While designing the envelope channel, traders must determine an optimal amount of distance to use when plotting the envelopes

In summary, envelopes in technical analysis are two lines used to measure the trading range of a security, providing investors and traders with buy and sell signals as the price either reaches or crosses the upper or lower band of the envelope channel. The upper and lower lines can be created by a variety of methods including a simple moving average or a percentage distance above and below the moving average, and are especially useful for measuring volatility, which allows for more accurate entry and exit points when trading within the range.