Nadaraya-Watson Regression Liquidity Sweeps

The Nadaraya-Watson Regression Liquidity Sweeps tool combines advanced kernel-based smoothing with momentum analysis to identify key liquidity zones and trend transitions. By converting the slope of a Nadaraya-Watson regression curve into a normalized oscillator, the script highlights where price momentum is shifting and marks swing-based liquidity levels that often act as future targets for price sweeps.

Usage

The script is designed to provide a comprehensive view of market structure through several integrated features:

• Momentum Oscillator: Monitor the central oscillator and its signal line. Crossovers and zero-line breaches help identify changes in directional bias and momentum strength.
• Liquidity Sweeps: When momentum begins to weaken (marked by dots on the chart), the script anchors a horizontal liquidity level. Watch for price to "sweep" or cross these levels, which often indicates the exhaustion of resting orders.
• Rebound Signals: These signals (triangles) appear when price reclaims the Nadaraya-Watson regression value while the oscillator remains aligned with the trend. This is useful for identifying high-probability trend continuation entries after a pullback.
• Volatility Band: The dynamic overlay on the price chart provides context for trend direction. When price is trading above the regression line with a green band, the trend is considered bullish.

Details

The script utilizes a kernel-based Nadaraya-Watson smoothing method, which weights historical data based on its proximity to the current bar, creating a more responsive trendline than traditional moving averages. The oscillator is derived from the "Normalized Regression Slope," calculated by dividing the change in the regression estimate by its standard deviation. This normalization allows the momentum readings to remain consistent regardless of changing market volatility.

Settings

Oscillator

• Normalization Length: Sets the window for standard deviation used to scale the oscillator.
• Oscillator Smoothing Length: The length of the WMA smoothing applied to the normalized slope.
• Signal Length: The EMA length used for the oscillator's signal line.

Regression & Volatility

• Nadaraya-Watson Bandwidth: Controls the "width" of the kernel; higher values result in a smoother, slower curve.
• Nadaraya-Watson Lookback: Determines how many historical bars are used in the calculation.
• ATR Length & Volatility Smoothing: These settings control the sensitivity of the volatility-adjusted band and rebound signals.

Liquidity Levels & Appearance

• Use Swing Points: If enabled, levels anchor to the absolute high/low of the momentum phase. If disabled, they anchor to the specific bar where momentum weakened.
• Show NW Band Candles: Toggles the visibility of the volatility-adjusted regression overlay.
• Show Bar Colour Candles: Colors price candles based on the oscillator's momentum state.

FAQ

How do I interpret the momentum weakening dots?

The small dots represent areas where the regression slope is losing its acceleration. These often precede a pullback or a consolidation phase, and they serve as the anchor points for the liquidity levels drawn on the chart.

What is the difference between a sweep and a rebound?

A liquidity sweep occurs when price moves through a previously established swing level (the horizontal lines). A rebound occurs when price pulls back to the regression mean and then bounces back in the direction of the prevailing momentum.

How can I access Nadaraya-Watson Regression Liquidity Sweeps?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.