Nadaraya-Watson Envelope

Question 1: What is the Nadaraya-Watson Envelope?

It draws a smooth average line through price with a band (envelope) around it. When price pokes outside the band it's stretched too far and likely to snap back toward the middle - so it's a 'fade the extreme' tool.

Question 2: How do I trade it?

Best when the market is going sideways. If price tags the top band, that's a hint it'll pull back down; if it tags the bottom band, a hint it'll bounce up - aiming back at the middle line.

Question 3: What are the settings?

How smooth the line is, how wide the band is, the price it's based on, and a 'repaint vs non-repaint' switch (see below).

Question 4: Does it repaint?

In its default mode, yes - the line can quietly redraw itself on past bars, which flatters the signals. Switch to the 'non-repainting' mode so what you see is real and won't change later.

Question 5: When does it fail?

In a strong trend, price can ride along the band for a long time and the 'fade' bets get crushed. Only use it when the market is clearly range-bound.