Originally Posted by
77seas
"The first setup is to find the envelope size, which is the size that comprises 90% of the daily price bars around an average.
For example, if you take 20D, there will be wider fluctuations around the 20D average and hence the width of the envelope will be larger than if you use 5D. At this point, the envelope just tells you that there is 90% of chances that the price will stay within the envelope. This means for example that if you buy/short in the middle of the envelope and that if the envelope width is for example +/- 5%, by setting your stop above 5%, you only have 10% of chance that the stop will be hit (and you can trail the stop with the envelope.)"
Pascal
I think the chance of hitting the stop for a long trade taken at the midpoint of the envelope is only 5%. This is because if the envelope is covering 90%of the prices then 5% of the values are outside the upper channel boundary and another 5% outside the lower boundary. In a long position, for the stop only lower boundary is relevant. Also do you draw the envelopes by trial and error?
Thanks