Envelope EMA deviation

I'd like to start by apologizing if this is the incorrect forum to post this topic.

I've been recently trying to use just a few indicators (2 to be precise, EMA and envelopes based on EMA) for swing trading.

However, although i've done some research on google, i cannot find an analytical and serious answer as to what exactly does the deviation represent (also called channel coefficient?).

I understand the rest of the formula, but since im using envelopes, i see how much they are affected by the deviation, yet i do not understand what the deviation applies to, and how to adjust it. Is it the deviation from EMA current price rate?

Say if current rate is 1.300, a deviation of + 5% or -%5 will be used to calculate the upper and lower band?

I would really appriciate if anyone would care to explain, or point me to a good link.

Thank you in advance.

From the book : Come into my trading room


A moving average reflects the average consensus of value, but what is
the meaning of a channel? The upper channel line reflects the power of
bulls to push prices above the average consensus of value. It marks the
normal limit of market optimism. The lower channel line reflects the power
of bears to push prices below the average consensus of value. It marks the
normal limit of market pessimism. A well-drawn channel helps diagnose
mania and depression. Most software programs draw channels according
to this formula:

Upper channel line = EMA + EMA • Channel coefficient
Lower channel line = EMA − EMA • Channel coefficient

A well-drawn channel contains the bulk of prices, with only a few
extremes poking out. Adjust the coefficient until the channel contains
approximately 95 percent of all prices for the past several months. Mathematicians
call this the second standard deviation channel. Most software
packages make this adjustment very easy.
Find proper channel coefficients for any market by trial and error. Keep
adjusting them until the channel holds approximately 95% of all data, with
only the highest tops and the lowest bottoms sticking out. Drawing a channel
is like trying on a shirt. Choose the size in which the entire body fits comfortably,
with only the wrists and the neck poking out.



Different trading vehicles and timeframes require different channel
widths. Volatile markets require wider channels and higher coefficients.
The longer the timeframe, the wider the channel; weekly channels tend to
be twice as wide as dailies. Stocks tend to require wider channels than
futures. A good time to review and adjust channels in futures is when an
old contract nears expiration and you switch to the new front month.
A channel drawn in an uptrend tends to fit the peaks. Rallies in a bull
market are much stronger than declines, and bottoms seldom reach the
lower channel line. In a downtrend, a channel tends to track bottoms,
while the tops are too limp to rise to the upper channel line. It is unnecessary
to draw two separate channels, one for the tops and the other for
the bottoms; just follow the dominant crowd. In a flat market expect both
tops and bottoms to touch their channel lines.
When we are bullish, we want to buy value near the rising EMA and take
profits when the market becomes overvalued—at or above the upper channel
line. When bearish, we want to go short near the falling EMA and cover
when the market becomes undervalued—at or below the lower channel line.


If you buy near a rising moving average, take profits in the vicinity of
the upper channel line. If you sell short near a falling moving average,
cover in the vicinity of the lower channel line.

When prices blow out of a channel but then return to the moving average,
trade in the direction of the slope of that MA, with a profit target near
the channel line.

If a moving average is essentially flat, go long at the lower channel line,
sell short at the upper channel line, and take profits when prices return to
their moving average.

Hi!

Thanx for the reply, i've been reading this book lately, but he does not go into depth about what the channel co-efficient represents (deviation from the current price rate i presume at this point).
Anyone who can enlighten me?

Cheers!