nXML mode is designed to support the creation of standalone XML documents that do not depend on a DTD. Although it is common practice to insert a DOCTYPE declaration referencing an external DTD, this has undesirable side-effects. It means that the document is no longer self-contained. It also means that different XML parsers may interpret the document in different ways, since the XML Recommendation does not require XML parsers to read the DTD. With DTDs, it was impractical to get validation without using an external DTD or reference to an parameter entity. With RELAX NG and other schema languages, you can simultaneously get the benefits of validation and standalone XML documents. Therefore, I recommend that you do not reference an external DOCTYPE in your XML documents.
One problem is entities for characters. Typically, as well as providing validation, DTDs also provide a set of character entities for documents to use. Schemas cannot provide this functionality, because schema validation happens after XML parsing. The recommended solution is to either use the Unicode characters directly, or, if this is impractical, use character references. nXML mode supports this by providing commands for entering characters and character references using the Unicode names, and can display the glyph corresponding to a character reference.