Nadaryara Watson X RSI Divergence (intermediate)

This trading strategy combines RSI Divergence with the Nadaraya Watson envelope to identify potential market reversals and improve trade decisions

Nadayara-Watson Envelope X RSI Divergence

Notes:

These indicators and concepts are specifically designed for TradingView.com

All indicator breakdowns will be found in the indicators tab on the home page of: STRATEGY

Indicators:

Go to INDICATORS and type in RSI Divergence

Go to INDICATORS and type in Nadaraya Watson Envelope

Important not about Nadarya: It repaints, you cannot use it as a standalone sigal as it will repaint itself afterwards and change how it looked in the past to appear more accurate

How to enter a long

The following paramaters must happen

The price must have broken below the lowest red band of the Nadaraya Envelope and must have printed a green triangle
The RSI Divergence must immediately change from red to green (it must be extremely recent)
To exit you can wait until RSI Divergence turns red or price breaks above Nadarya Watson top envelope

Possible long entries shown in pink (green triangle is printed as price beaks below red nadarya line, the RSI IMMEDIATELY changes to green)

Example long exit in white (the rsi turns red, while it may seem very fast the rsi turns green again at the 21 value at the rsi so you could theoretically enter again)

In Lehmans Terms: The stock needs to be below the red lower band of the envelope (a green triangle will appear), the bottom graph must IMMEDIATELY turn from red to green. If all are met stock likely to rise.

How to enter a short

The following paramaters must happen

The price must have broken avove the highest green band of the Nadaraya Envelope and must have printed a red triangle
The RSI Divergence must immediately change from green to red (it must be extremely recent)
To exit you can wait until RSI Divergence turns green or price breaks below Nadarya Watson bottom envelope

Example Short entries (Nadaraya Prints red sell and RSI immediately turns red)

Exits of shorts shown (the pink exit is for the fist white entry, in this example the Nadarya prints green triangle to exit short. In the 2nd entry we would leave at the cyan box as the RSI turns green, while this may seem very fast this actually was over a 2hr trade and would have made 2.24%)

In Lehmans Terms: The stock needs to be above the green upper band of the envelope (a red triangle will appear), the bottom graph must IMMEDIATELY turn from green to red. If all are met stock likely to fall.

This next part is advanced so don't be overwhelmed if you are overwhelmed.

How does the The Nadayara-Watson (NW) Envelope work?

The Nadayara-Watson (NW) Envelope is a technical analysis tool that is used to identify potential support and resistance levels in financial markets. It is similar to other envelope indicators, such as the Bollinger Bands and Keltner Channels, but uses a different calculation method. The NW Envelope is based on a mathematical formula that calculates a band of upper and lower envelopes around the price action of a security. The band is calculated by taking a moving average of the high and low prices over a certain period and then multiplying this value by a percentage factor. The resulting upper and lower bands then form the NW Envelope.

The formula for calculating the NW Envelope is as follows:

Upper Band = SMA(High, N) x (1 + k x SD(High, N))Lower Band = SMA(Low, N) x (1 - k x SD(Low, N))

Where:

SMA = Simple Moving Average
High = the highest price of the security for a certain period
Low = the lowest price of the security for a certain period
N = the number of periods used in the moving average
k = the percentage multiplier applied to the standard deviation
SD = Standard Deviation

The NW Envelope pulls data from the price bars of the instrument being traded, typically using closing prices. The price bars can be from any time frame, depending on the trader's preferences and the instrument being traded. Traders can use the NW Envelope in several ways to make trading decisions. One common approach is to look for price breakouts outside of the upper or lower bands. When the price breaks above the upper band, this could be a signal to go long, while a breakout below the lower band could be a signal to go short. Another approach is to look for bounces off the upper or lower bands. When the price reaches the upper band, this could be a potential resistance level, and a bounce down from this level could be a signal to go short. Conversely, when the price reaches the lower band, this could be a potential support level, and a bounce up from this level could be a signal to go long. Traders can also use the NW Envelope to identify potential trend reversals. When the price breaks through the upper or lower band in the opposite direction of the trend, this could be a signal that the trend is reversing.

How does the RSI Divergence Work?

The Relative Strength Index (RSI) is a technical analysis tool that measures the strength of price movements for an asset. RSI divergence occurs when the price trend and the RSI trend move in opposite directions, which suggests a potential reversal or a change in trend direction. To trade RSI divergence, traders typically wait for a confirmation signal before entering a trade. One way to confirm RSI divergence is to wait for a crossover of the RSI line over the signal line. Alternatively, traders may also wait for bullish or bearish candlestick patterns to confirm the signal. It's also possible to use other indicators, such as moving averages or trendlines, to confirm the divergence signal. To calculate the RSI, the average gain over a set period is divided by the average loss over the same period. The result is then normalized to a scale of 0-100. Generally, an RSI reading above 70 is considered overbought, while a reading below 30 is considered oversold. Traders can use these levels as a guide when looking for RSI divergence. When trading RSI divergence, it's important to be patient and wait for confirmation before entering a trade. False signals can occur, so traders may also use a stop loss to manage risk. Additionally, traders may use RSI divergence in combination with other indicators to gain further insights into market dynamics.

For example, traders may use RSI divergence in combination with moving averages to identify support and resistance levels. When the RSI indicates a potential trend reversal, traders can look to the moving averages for confirmation of the reversal.