Envelopes represent bands that are plotted in a certain, identical relationship above and below the Moving Average. Envelopes are a very complex theme with many interpretation and trading rules. Basically, envelopes capture a significant part of price movements. Concrete trading signals are released if prices approach or move away form their envelope. Professional plots envelopes around a Moving Average in a constant percentage distance. Hence they are added to or subtracted from this average. Both envelope lines thus define the prevailing trading range.

The Moving Average Envelope study is a derivative of the Moving Average study. The price band has two lines that are equal percentage distance from the Simple Moving Average. The Moving Average line is not visible.
While several different trading rules are available, the most simple approach uses the price band as an entry and exit point. When price penetrates the upper price band, you initiate a long position or buy. If you have an existing short position, you close out shorts and go long. Conversely, when prices penetrate the lower price band, you close out long positions and go short.

This indicator is described in more details in the Steve Achelis' book "Technical Analysis from A to Z".

Formula: