The Nadaraya-Watson envelope is a type of moving average calculated by taking a weighted average of data points over a period of time. The envelope is created by drawing two lines (one above and one below) parallel to the moving average at a user-defined percentage distance. Top and bottom lines form a “band” around the moving average that can be used to identify potential trend changes and generate trading signals. The Nadaraya-Watson cover is named after its creators, Vasily Nadaraya and his Geoffrey Watson.
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