Crypto Academy Season 5 [ Advanced course ] week 7: Crypto Trading With SuperTrend Indicator

in hive-108451 •  8 months ago 
Good day steemians, This is season 5 week 7 and I'll be doing the advanced task assigned by crypto professor @kouba01

TASKS

  1. Show your understanding of the SuperTrend as a trading indicator and how it is calculated?

  2. What are the main parameters of the Supertrend indicator and How to configure them and is it advisable to change its default settings? (Screenshot required)

  3. Based on the use of the SuperTend indicator, how can one predict whether the trend will be bullish or bearish (screenshot required)

  4. Explain how the Supertrend indicator is also used to understand sell / buy signals, by analyzing its different movements.(screenshot required)

  5. How can we determine breakout points using Supertrend and Donchian Channel indicators? Explain this based on a clear examples. (Screenshot required))

  6. Do you see the effectiveness of combining two SuperTrend indicators (fast and slow) in crypto trading? Explain this based on a clear example. (Screenshot required))

  7. Is there a need to pair another indicator to make this indicator work better as a filter and help get rid of false signals? Use a graphic to support your answer. (screenshot required)

  8. List the advantages and disadvantages of the Supertrend indicator:

  9. Conclusion:'




Image designed in canva<?sub>

1. Show your understanding of the SuperTrend as a trading indicator and how it is calculated?

The supertrend indicator is a trend following indicator crated by Olivian Sebian to aid functionality in the market irrespective of the timeframe selected.The super trend indicator makes use of the Average True Range to calculate its value with regard to volatility.

The basic motive behind the creation of the super trend indicator is to give trade signals to traders with respect to the current trend in the market. It does this by using flips to represent its trend. Whenever the price of an instrument rises above the indicator value, the super trend indicator represents this with a green flip and conversely, whenever the price of an asset falls below the indicator value, its represented with a red flip, in this situation traders should only look for sell signals.

Super trend indicator calculation
The mathematical formula for the super trend indicator is given below:
In calculating the supertrend upper line
Supertrend Upper Line (RED line) = (High + Low) / 2 + multiplier × ATR.

In calculating the supertrend lower line:
Supertrend Lower line (Green Line) = ( High + Low) / 2 - Multiplier × ATR.

visual illustration of the supertrend calculation


Calculation of supertrend DownLine (Green Line)

image.png

I have applied both the supertrend indicator and an average true range indicator to chart. Since the ATR within the supertrend has a value of 10, I'll adjust the added ATR from a default value of 14 to a 10 period value also.
I've made use of vertical and horizontal lines to specify the values of the candlestick and ATR values as well as the supertrend downline(green line) in question.
The necessary values for the calculation are given:
High = 5.2104
Low= 5.0290
ATR = 0.1510( for 10 periods)
Multiplier = 3

With the use of the afore mentioned calculation for the green line
Supertrend Lower line (Green Line) = ( High + Low) / 2 - Multiplier × ATR.
(5.2104 + 5.0290) / 2 - (3 x 0.1510)
(5.1197 - 0.453)
=4.667 (slight difference of 0.02)

(The slight difference in the value is as a result of the inability of the horizontal line to accurately highlight the value of the candlestick due to extremely low values.)

Calculation of supertrend upperline(redLine)


image.png

Here, I've also made use of vertical and horizontal lines to specify values of the candlestick and ATR values as well as the supertrend upperline(red line) in question.
The necessary values for the calculation are given

High = 162.53
Low= 155.36
ATR = 2.84( for 10 periods)
Multiplier = 3

With the use of the afore mentioned calculation for the red line
Supertrend Upper Line (RED line) = (High + Low) / 2 + multiplier × ATR.
(162.53 + 155.36) / 2 + (3 x 2.84)
(158.945) + 8.52
= 167.465 (slight difference of 0.02)
(The slight difference in the value is as a result of the inability of the horizontal line to accurately highlight the value of the candlestick due to extremely low values.)


image.png

2. What are the main parameters of the Supertrend indicator and How to configure them and is it advisable to change its default settings?


Main parameters of the supertrend indicator

Average True Range

The average true range is derived by calculating the true range relative to the values of an instrument and taking the average of the true range values gotten over a period of time.

The true range is gotten by doing some series of calculations, whichever one of the three values gotten gives the highest value is taken as the true range for the period

  • Current high minus current. low
  • Current high minus previous close
  • Current low minus previous close

Lets say the trading period in consideration is seven days, the trading period for each period will be calculated using the above formula and the average of those values will be taken using the formula.

Current ATR = ((Prior ATR x 6) + Current TR) / 7.

The value gotten would serve as the Average True Range (ATR) for the period.

Multiplier

This is a numerical value by which the ATR value is multiplied by to give the value of the Supertrend indicator.The default multiplier or factor parameter is equal to 3. Changing this value will impact the mode in which the indicator anticipates market entry and exits. For example, if i decide to lose a lower multiplier value, lets say 2

Firslt, lets look at a chart using a multiplier value of 1 and then compare it to the default multiplier value of 3 and finally compare it again to signals generated using a multiplier value of 5 highlighting where the various trade signals are given for comparison.


image.png
chart illustration using a multiplier value of 1


image.png
chart illustration using default multiplier value of 3


image.png
chart illustration using a multiplier value of 5

Observation
In comparison to the supertrend default multiplier value of 3, using a value of 1 makes the indicator oversensitive to market movements as it generates too many false or late, or early signals. This value would only be useful for scalp trading on lower timeframes.

The indicator value of 5 filters out some signals and increases accuracy at the expense of fewer signals. This value would be effective for trading on longer timeframes

Therefore, when deciding to configure or change the default parameters of the supertrend indicator. Its important to do so with respect to your trading style. Long traders will discover higher periods to be more effective while short intra day traders would have more use of the smaller periods.
The best period setting can be discovered by testing multiple times on a financial instrument. This can be done without having to lose assets by making use of demo accounts or paper trading software by trading view

Adding the supertrend indicator to chart

I'll be making use of trading view to customize the Super trend indicator.

  • Firstly, I head over to trading view official website and click on charts to select a chart pair of my choice.
  • Next, I click on the tab marked fx indicators located at the center top.

    fx.png
  • In the search bar, type in supertrend and click on the option to add the indicator to chart.

    fx2.png
  • Once the above is done, the indicator will be added to chart successfully.

    image.png
    Images in this section were gotten from the trading view interface


    image.png

    3. Based on the use of the SuperTend indicator, how can one predict whether the trend will be bullish or bearish

The Supertrend indicator is particularly effective at determining the state of the existing trend in the market.
One way to determine the trend of the market using the supertrend indicator is to pay attention to the color of the flip and price movement.

Bullish trends

Whenever the supertrend gives off a green-colored flip and price continues to make higher highs and lows then the existing market structure is said to be bullish. In this market condition, traders should look for only bullish entries as shown in the image below.

image.png
Screenshot gotten from Trading view

Bearish trends

Conversely, whenever the supertrend gives off a red-colored flip and price continues to make lower highs and lows then the existing market structure is said to be bearish. In this market condition, traders should look for only bearish entries as shown in the illustration below.

image.png
Screenshot gotten from Trading view

However, certain scenarios, exist when the supertrend indicator would give mixed signals. In this situation, no trades should be taken as the current trend of the market hasn't been established yet and taking trades off these signals may result in a loss.
An example of such situations given in the image below.


image.png
Screenshot gotten from Trading view

In the AXS/USD chart pair above, we notice how price went into a minor state of consolidation as price oscillated within defined support and resistance levels unable to make a break. At this stage, the supertrend indicator gave off a couple of mixed signals which could have resulted in a loss.


image.png

4. Explain how the Supertrend indicator is also used to understand sell / buy signals, by analyzing its different movements


The supertrend indicator not only identifies market trends. It can also be used to understand buy and sell signals. The strategy for this is to watch out for divergences between the supertrend indicator i.e whenever price follows a direction opposite that of the supertrend indicator.

This situation tells us that a market reversal is imminent

BUY signal

A buy signal is given whenever the supertrend indicator crosses below the candlestick. This signal is given when the green flip starts to form under the candlestick and it's used as a buy entry signal as indicated below.


image.png

SELL signal

Similarly, a sell signal is given whenever the supertrend indicator crosses above the candlestick. This signal is given when a red flip starts to form above the candlestick and its used as a sell entry signal as indicated below.

image.png

The supertrend indicator can also be used as a trade exit criteria. Traders can use the supertrend indicator to determine when to close their positions by waiting for the indicator flip to reverse color and direction


image.png

5. How can we determine breakout points using Supertrend and Donchian Channel indicators?


By combining the supertrend indicator with another technical analysis indicator, "Donchian channels". A breakout strategy can be created where ther supertrend indicator would function as a trend filter.

Bullish breakouts using the supertrend indicator and donchian channels
According to this strategy, bullish breakouts occur whenever two consecutive bullish candles close above the donchian channels and the supertrend indicator gives forth bullish signals (presence of green flip). Whenever this condition is fulfilled, this means there is a bullish trend and only long positions are opened. This scenario is shown in the image below


image.png

Bearish breakouts using the supertrend indicator and donchian channels
Similarly, with respect to the strategy. Bearish breakouts occur whenever two consecutive bearish candles close below the lower limit of the donchian channels and the supertrend indicator gives forth bearish signals (presence of red flip). Whenver this condition is fulfilled, this indicates the presence of a bearish trend and only short positions are opened. This scenario is shown in the image below


image.png


image.png

6. Do you see the effectiveness of combining two SuperTrend indicators (fast and slow) in crypto trading?

Just like trading with double exponential moving averages where one is made to have a higher value than the other to better confirm trades. Combining two supertrend indicators, one with a slower value than the other can help to improve the effectiveness and accuracy of signals given when compared to using a single supertrend indicator.

Lets make use of two indicators, lets say supertrend (21,2) and supertrend (10,3)


image.png

Using this, the strategy is that a sell signal is given when the fast curve crosses the slow one from above and both are projected downwards


image.png
images used in this section were gotten from trading view

and similarly a buy signal is given when the fast curve crosses the slow curve from below to the top and both are projected upwards, consistent in color. This strategy also helps to give exit signals, a signal is exited when the fast curve returns under the slow curve after a long signal and when the fast curve returns above the slow curve after a short signal.
image.png

7. Is there a need to pair another indicator to make this indicator work better as a filter and help get rid of false signals?


The supertrend indicator just like any other technical analysis indicator works best when paired with other indicators. The supertrend indicator should be paired with indicators that'll help to filter out false signals it gives off. One of such indicator is the Moving Average Convergence Divergence MACD.

In this strategy, the MACD will function as the leading indicator since it gives off signals early and trades will only be taken whenever the supertrend indicator confirms it. Which means, the supertrend indicator will function as a confirmation indicator as illustrated in the chart pair below.


image.png

In the AXS/USDT chart pair, we observe the MACD gave off a couple of signals through its crossover lines. Here, we wait until the supertrend indicator confirms the signal before taking it. Since, the MACD is a bit volatile and responds to price changes, its bound to give off some signals early just like the instance where a buy signal was given by the MACD, however this wasn't confirmed by the supertrend indicator and hence, such signals will be ignored.
This trading strategy has a high profitability ratio however, it can only be used on timeframes higher than 15 to guarantee accuracy.


image.png

8. List the advantages and disadvantages of the Supertrend indicator:


Advantages

  • The supertrend indicator offers the quickest technical analysis to intra day traders
  • Its strategy is simple to grasp and understand
  • It's useful on multiple timeframes depending on the traders customization.

Disadvantages

  • It doesn't function well in non trending markets as its a trend following indicator.
  • It utilizes only two parameters of the ATR and multiplier and this is not sufficient enough to predict the market with utmost accuracy
  • When used with smaller periods it generates false signals


image.png

Conclusion


The supertrend indicator created by Olivian Sebian is a great technical analysis tool to help traders take trades with respect to the existing trend in the market.
The crypto professor has done an excellent job of explaining the use of this indicator in a simple way. Thanks to the steemit team for the crypto academy, It's done far much in helping me tackle the markets one indicator/strategy at a time.

All images used in this task were gotten from trading view unless otherwise stated

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