Enveloping

Enveloping means setting reasonable bounds on the price of a stock.  Typically when a stock price stays within these bounds, it is considered uninteresting.  When the price moves outside of these bounds, that is considered an interesting event.

There are numerous methods to create an envelope for a stock price.  One of the most popular is Bollinger Bands, shown below.  This algorithm uses the moving average of a stock price to set the center of the envelope.  It uses a standard deviation to set the size of the envelope.

Typically we use our own proprietary algorithm based on the random walk model to create an envelope for the price.  The primary difference between our model and the traditional models is the way we use time.  In the picture above, the bounds grow large when the price suddenly changes.  But it grows in both directions.  After the price has dropped significantly, the Bollinger Bands model suggests that the price is more likely to jump back above its original price than it is to stay at the current price or even to move up a little.  Our models pay more attention to more recent prices, but to older volatility numbers.  In this case, after the price has shown that it’s not immediately returning to the original price its probably going to stay near the current price.

Also, our algorithms also pay more attention to volume to confirm a trend, where the traditional algorithms pay more attention to time.  And our algorithms are constantly watching a large number of time frames, where a trader traditionally only plots envelopes for one or two timeframes.  The number of charts that the trader can display on his monitor limits this.  Our algorithms all automatically do the math and alert the trader to interesting results, so there is no need to plot them on a graph.