7trade Nadaraya-Watson: a channel around the smoothed price
Nadaraya-Watson draws a channel over the candles: in the middle is the smoothed close price, at the edges are bands at the typical range of swings around it. It answers the question "how far has the price moved from normal". After this article you will understand every line and mark, the three views, the events for strategies and all the settings. How to turn the indicator on is covered in "7trade bot: introduction".
Why it is useful
The price swings around its middle. While it is inside the channel, these are ordinary swings. When it goes beyond a band, it has moved farther than usual. Then two outcomes are possible: the price comes back to the middle or the move continues. The indicator's marks show what actually happened: a return, a wick rejection or an exit.
The indicator is adapted for binary options:
- fast middle — on a steady move it follows the price without lagging;
- stretch zones — between the inner and outer bands: the price is already far from the middle but has not left the channel yet;
- expiry corridor — a dotted line on the right for the length of the trade: where the middle will get to and how far the price usually travels in that time;
- calculates from the past only — lines on closed candles are not redrawn after the fact.
Below is a live chart on real candles. Click it to open it large; there a click on a line, a zone or a mark shows an explanation. The ⚙ icon opens the settings window.
What is on the chart
| Element | Meaning |
|---|---|
| Middle, green | The smoothed close price, the middle is rising. A colour change means the middle turned |
| Middle, red | The middle is falling |
| Outer bands | The middle plus or minus the typical range multiplied by a multiplier. The price rarely goes beyond them |
| Inner bands | The same bands with a smaller multiplier |
| Pale fill between the inner bands | The typical range around the middle |
| Bright zones between the inner and outer bands | Stretch zones: the price has moved farther from the middle than usual but has not left the channel yet |
| Expiry corridor — a dotted line on the right | The sloped one shows where the middle will get by the end of the trade if it keeps the same slope. The horizontal ones show how far the price usually travels up and down in that time |
| below a candle | The close went below the outer lower band. It is placed on the exit bar, not on every bar outside |
| above a candle | The close went above the outer upper band |
| below or above a candle | Wick rejection: the wick went beyond the outer band, while the close stayed inside the channel |
| below or above a candle | Return to the channel: the previous close was beyond a band, this one is inside again |
An exit beyond a band does not choose a direction by itself: it may be an overshoot or the start of a move. The direction is suggested by what comes next: a return or a rejection .
The bands are set from the middle at the average range of the price around it, not at a fixed distance. So the channel narrows by itself in a lull and widens on a move.
If the middle is farther than a typical move per trade, the price usually does not get there within one trade.
Hints
Click a line, a zone, a mark or the corridor to see a plate: what it is and what to do with it (a coloured dot and "CALL", "PUT", "Wait" or "Do not enter"). The plate stays until you click elsewhere. Under the line is the state of the last bar: where the price is and how stretched it is, where the middle is going, how wide the channel is, how far the middle is within the trade, which mark was last. The stretch is how many typical ranges the close is away from the middle: plus — above, minus — below. To make the plate appear on a mouse hover too, turn on "Show the explanation on hover" in the "Panel view" section — it is off at the start.
Three views
The "What to show" switch in the "Panel view" section.
| View | What you see |
|---|---|
| Channel | The middle, both pairs of bands with the stretch zones filled, and the expiry corridor. No marks |
| Signals | The middle, the outer bands, the marks on the candles and the corridor. No inner bands or fill, so the marks read clearly on the candles. This is the starting setup |
| All | Both pairs of bands, the fill, the corridor and all marks at once |
Events for strategies
In the "Strategies" window the events of this indicator are listed with the prefix "Envelope:".
| Event | When it fires | CALL / PUT |
|---|---|---|
| price crossed the middle | The close crossed the middle. If the middle itself came to the price, that is a cross too | Up / down |
| price relative to the middle | State: the close is above or below the middle | Above / below |
| price left the band | The close went beyond the outer band — along the move | Above the upper / below the lower |
| price came back to the channel | The close came back inside after an exit — the mark | Came back from below / from above |
| price outside the channel | State: the close is beyond the outer band now. No event inside the channel | Above the upper / below the lower |
| middle slope | State: the middle is rising or falling | Rising / falling |
| middle turned | The middle changed direction — the bar where it changes colour | Up / down |
| channel wider than usual | State: the channel is wider than its own average — a move, the range has grown | None |
| channel narrower than usual | State: the channel is narrower than its own average — a lull | None |
| wick rejection from the band | The mark. If the wick went out on both sides, there is no event | Wick below the lower / above the upper |
| price beyond the inner band | State: the close is in the stretch zone or farther | Above the inner upper / below the inner lower |
| came back inside the inner band | The previous close was in the stretch zone, this one is closer to the middle again | From below / from above |
"Price left the band" reads an exit along the move: a close above the upper band gives CALL. The and marks stand on the same bars, but on the chart an exit is read as a possible reversal. If you need that reading, tick "invert" on the rule. The same goes for "price beyond the inner band": with the checkbox it reads as "overstretched — will come back".
All settings
The window opens with the ⚙ icon — on the Nadaraya-Watson card in the "Indicators" window or in the header of its panel below the chart. If the channel is drawn over the candles — with the pencil in its line of the chart legend. While a strategy with this indicator is running, the panel uses the strategy's settings, not the window's.
How to read
The first section is a reminder of the elements, the same as the table above. It has no settings.
Panel view
| Field | What it does |
|---|---|
| What to show | The view: "Channel", "Signals" or "All" |
| Explain elements on click | The main switch for the plates |
| Show the explanation on hover | The plate follows the mouse. Off at the start so it does not cover the candles |
| Add the state to the plate | Lines about the last bar in a pinned plate |
Middle
| Field | What it does |
|---|---|
| Show the middle | The line itself |
| Colour by slope | Green while rising, red while falling. Untick it for a single colour |
| Middle | "Fast" — a straight line is fitted to the last bars; on a steady move the middle follows the price without lagging and slightly overshoots at a reversal. "Smooth" — a weighted average of closes: smoother, but lags the price by a few bars |
| Calculation window, bars | Over how many bars the smoothing and the average range are calculated. The indicator is silent until the window fills. 60 at the start |
| Kernel bandwidth | How far into the past the smoothing "sees": more — a smoother middle. 16 at the start; with the smooth middle 8 is usual |
Bands
| Field | What it does |
|---|---|
| Outer bands | Show the outer bands |
| Outer — in average ranges | The outer band multiplier, 3 at the start. More — the price leaves the channel less often, but each exit is farther from normal |
| Inner bands | Show the inner bands |
| Inner — in average ranges | Where the stretch zone begins, 1.5 at the start. Must be less than the outer one |
| Fill | The pale channel fill and the bright stretch zones. Not drawn without the outer bands |
Expiry corridor
| Field | What it does |
|---|---|
| Show the corridor | The dotted line on the right |
| Tags on the right | Points to the middle by the end of the trade and the typical price move in that time |
| Expiry, bars | Trade length in bars. On M1 a bar is a minute: 3 is a three-minute trade |
| Typical move — over how many bars | Over how many recent bars the typical move per trade is calculated |
Marks
| Field | What it does |
|---|---|
| Exit beyond a band | Exit marks |
| Wick rejection | Rejection marks |
| Return to the channel | Return marks |
Marks are placed on closed candles only. Marks that fall on one candle stack outwards from the candle.
Presets
| Preset | What it sets |
|---|---|
| 1-min trade | The corridor and the typical move over one bar |
| 3-min trade | Over three bars — the starting setup |
| 5-min trade | Over five bars: the corridor is wider and reaches farther to the right |
| Smooth channel | The smooth middle with a bandwidth of 8: smoother, but lags the price on a steady move |
Legend
All colours in one list; each can be changed. Here is also the button that returns all settings to the starting ones.
What Nadaraya-Watson does not do
- It does not know the future. An exit beyond a band means the price has moved farther than usual, not that it will come back. The corridor shows where the middle will get with the same slope, not where the price will go.
- It does not enter trades by itself. Trades are opened by a strategy from the "Strategies" window.
- It does not redraw the past. The middle on a closed candle is calculated only from the candles before it and does not change later.
- It does not put a mark on an unclosed candle. The mark appears when the candle closes.
Frequently asked questions
The price is beyond the band — so it will come back soon? Not necessarily. An exit can be an overshoot or the start of a move. A return is marked with a separate mark when it has already happened.
How is the fast middle different from the smooth one? The fast one follows the price on a steady move and slightly overshoots at a reversal. The smooth one is smoother but lags by a few bars. The "Smooth channel" preset sets the smooth one.
Why is the channel sometimes narrow and sometimes wide? The width comes from the average range of the price. In a lull the channel narrows, on a move it widens.
Why is there no channel at the start of the chart? The indicator needs to fill the calculation window — 60 bars at the start.
What's next
- Renko — bricks the size of the price move per trade.
- Twin Range — a filter line and a rest zone.
- Strategies — the builder — how to build a rule from events.