Nadaraya-Watson Envelope [LuxAlgo]

This indicator builds upon the previously posted Nadaraya-Watson Estimator. Here we have created an envelope indicator based on kernel smoothing with integrated alerts from crosses between the price and envelope extremities. Unlike the Nadaraya-Watson Estimator, this indicator follows a contrarian methodology.

For more information on the Nadaraya-Watson Estimator see:

Please note that the indicator is subject to repainting. The triangle labels are designed so that the indicator remains useful in real-time applications.

Settings

• Window Size: Determines the number of recent price observations to be used to fit the Nadaraya-Watson Estimator.
  
• Bandwidth: Controls the degree of smoothness of the envelopes, with higher values returning smoother results.
  
• Mult: Controls the envelope width.
  
• Src: Input source of the indicator.
  

Usage

This tool outlines extremes made by the prices within the selected window size. This is achieved by estimating the underlying trend in the price using kernel smoothing, calculating the mean absolute deviations from it, and adding/subtracting it from the estimated underlying trend.

We can expect the price to reverse when crossing one of the envelope extremities. Crosses between the price and the envelopes extremities are indicated with triangles on the chart.

For real-time applications, triangles are always displayed when a cross occurs and remain displayed at the location it first appeared even if the cross is no longer visible after a recalculation of the envelope.

As per popular demand we have integrated alerts for this indicator from the crosses between the price and the envelope extremities. However, we do not recommend this tool to be used alone or solely for real time applications. We do not have data supporting the performance of this tool over more classical bands/envelope/channels indicators.

Release Notes:

Added a disclaimer which displays a small message on the chart. You can hide this from within the settings menu by checking the "Hide Disclaimer" option.

Release Notes:

Minor changes.