Hello Everyone...!!!
I am much grateful participating in this week homework post by prof @kouba01. The detailed lesson provided on Crypto Trading with SuperTrend Indicator was very comprehensive.
1. Show your understanding of the SuperTrend as a trading indicator and how it is calculated?
Indicators form a crucial part in our crypto trading analysis and to always take advantage of the crypto market we need to know how to use indicators in our graph work. All these indicators have different functionalities, like Bollinger bands and Keltner channels being volatility based indicators and SuperTrend and ADX are trend following indicators. This article will explain some of the functionalities of the SuperTrend indicator.
SuperTrend just like any other trend following indicator is a technical indicator utilized by traders to predict or determine the direction of an asset market as it is the goal of every trader. This indicator was develop by Oliver Seban to be employed in our crypto pairs to determine trend (bullish, bearish and ranging phase) of asset and also provides information about the current price development.
Aside determining the direction of the market, the indicator measures volatility as it is based on the average value of the candles on a chart. The indicator is build-up of two parameters, multiplier and periods which help traders to trade with different timeframe. The Period determines the length of the duration that is taken into account for the calculation while the Multiplier determine the distance between the mean and the overtrend. This makes it easy for beginner to identify trend with this indicator and can change the period and multiplier to suit their trading strategy. The bigger the multiplier the greater the distance.
The SuperTrend indicator gives different signal with different periods and multiplier and also emit colours to signify the direction of trend. For bullish trend the indicator emit a green colour while projecting upwards and with bearish trend the indicator emit red colour while projecting downwards. Some functionalities of the SuperTrend indicator will explore in the follow up questions.
Calculation of the Super Trend Indicator
It is very easy in the calculation of the SuperTrend indicator as it’s mainly depend on the two parameter, Period and Multiplier. The indicator is calculated based on two bands, upper band and lower band.
- Upper Band = [High Price + Low Price] / 2 + (Multiplier Multiple * ATR)
The upper band is calculated by adding the Higher price and Lower price and divide by two, and then add the result to the product of the Multiplier and Average True range (ATR).
- Lower Band = [High Price + Low Price] / 2 - Multiplier Multiple * ATR
The lower band is calculated by adding the Higher price and Lower price and divide by two, and then subtract the result from the product of the Multiplier and Average True range (ATR).
Q2. 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)
The SuperTrend indicator as mention already has to main parameter, Period and Multiplier which basically determines the position of the indicator. The period indicates the ATR plotted with a default value of [10] while the Multiplier is plotted with a value of [3] to the ATR. Below are steps in adding the SuperTrend indicator to a chart.
First visit the official website of TradingView and access the chart fearture and choose any crypto pair of your choice.
At the top part of the window click on Indicators & strategies (fx).
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- In the search box, type in Super trend and select from the draw down menu that appears.
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From our chart, we can see clearly the SuperTrend indicator being added with its default settings.
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How to configure the Super Trend indicator ]
At the left side of the chart we can find the option to configure the setting og the indicator by clicking on settings from the options. The settings contains three sun features, Input, Style and Visibility.
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Input Tab
The input has a default value of 10 period for ATR and 3 period for ATR multiplier which I have changed to 10 period for ATR and 4 period for ATR multiplier.
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Style Tab
With the style tab, we can configure certain features like thickness, curve colour, and precision of the SuperTrend indicator.
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Visibility Tab
All the visibility options are left unchanged
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We can see clearly from our chart that all the changes made has reflected and we have successfully configure our SuperTrend indicator to our desire settings.
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Is it advisable to change its default settings?
Every trader goes by his/her trading strategy and timeframe and so left onto me there is the need to change the indicators default settings. The indicator gives different signals with different periods and scalping and swing traders can’t all use the same settings in their trades.
Though the default setting is not bad for any timeframe depending on the volatility of the market the indicator can be less effective in some cases. In Smaller adjustments, the Indicator can be more responsive to the value which means, more signals at an early stage. In Higher adjustments, the Indicator will eliminate the confluence from the market and will be less responsive to the value which means fewer signals. So changing the default settings will give precise reading more effective.
To actually get the best settings for the indicator on any timeframe we will have to select a particular crypto asset chart pair and continuously change the settings of the indicator to observe the signals give in order to decide which period and multiplier suit a particular timeframe.
Considering the default settings on a chart with a Multiplier of 3, the market will seem to have several exit and entry points, and as we go on to increase the multiplier we will see on our chart that our entry and exit points will start to reduce as far as we increase the multiplier. Reduction in the entry and exit points gives a clear and best position for traders.
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As seen on the BTCUSDT chart above, several signals were generated as we left the indicator in its default setting. Five signals for short position and four signals for long position.
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Again on the same chart as we increase the multiplier from 3 to 4, we can see that the number of short positions has reduced to Three and long positions has reduce to two give a clear and precise positions.
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Upon increasing the multiplier to 5 on the same chart above a more precise entry and exit signals were given and again a reduction in both entry and exit positions. Two short positions and one long position.
3. Based on the use of the SuperTend indicator, how can one predict whether the trend will be bullish or bearish (screenshot required)
SuperTrend indicator makes it very simple for traders in identifying the trend of a market. To identify trend with SuperTrend indicator there two things we should consider, the colour depict by the bands and the position of the bands. SuperTrend indicator doesn't identify ranging market and so only vary between bullish and bearish market. Below are illustrations for both bullish and bearish market.
BULLISH MARKET
For a bullish market, the band of the indicator is seen below price movement acting as support line in guiding price movement. The indicator as well emit Green colour along the supporting band while price move in higher-highs for the bullish trend continuation. See from the chart below.
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On the BNBUSDT chart above, a possible bullish trend continuation signal is given as the band formed below price action and emit green colour along. Traders should position themselves in buy position as the indicator gives an early signal for bullish trend.
BEARISH TREND
For a bearish market, the band of the indicator is seen above price movement acting as resistance line in guiding price movement. The indicator as well emit Red colour along the resistance band while price move in lower-lows for the bearish trend continuation. See from the chart below.
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On the BNBUSDT above, a possible bearish trend continuation signal is given as the band formed above price action and emit red colour along. Traders should position themselves in sell position as the indicator gives an early signal for bearish trend.
Q4. Explain how the Supertrend indicator is also used to understand sell/buy signals, by analyzing its different movements. (screenshot required)
In crypto trade buy/sell signal often happens at the point of reversal when a continuous trend changes direction as a result of failed momentum on the part of the current trenders' to keep pushing the market in their direction. Buy/sell signal form a crucial part in trading and it advisable to use several indicators to confirm positions.
From bullish to bearish trend reversal, we can have a signal for sell position and on the other hand, from bearish to bullish reversal we can have a signal for buy position. SuperTrend indicator identifies buy/sell signal in a similar way to trend identification. Let’s see illustration from the chart below.
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As price Cardano move in different direction we can observe several buy/sell signal given by the SuperTrend indicator.
A buy signal was detected when the band was seen to appear below price movement while price action start to form higher-high movement, with confirmation from the green colour of the band. We can as well see more green candlesticks forming which gives a signal that bulls are taking control of the market
A sell signal was detected when the band was seen to appear above price movement while price action start to form lower-low movement, with confirmation from the red colour of the band. We can as well see more red candlesticks forming which gives a signal that bears are taking control of the market
Q5. How can we determine breakout points using SuperTrend and Donchian Channel indicators? Explain this based on clear examples. (Screenshot required)
In trying to figure out breakout point for buy/sell signal with this task, we will be using the Donchian Channels indicator which is volatility-base and consist of three line (bands) that helps in identifying breaks, with the SuperTrend indicator as a trend following indicator, we will have to follow the trend of any crypto asset.
To be precise, what we will be looking for with the SuperTrend indicator and the Donchian Channels indicator is breakout points. For bullish breakout, we will be looking for a break above the upper line (band) of the Donchian channel to get a buy signal, and this breakout must be two consecutive bullish candlesticks for trade to take a buy entry and SuperTrend must be seen below price action with a green colour.
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From the chart above, we can see clearly how price action breaks the Donchian Channels indicator at the upper line and the two consecutive candlesticks appear to move little above the upper line and with the SuperTrend seen moving upwards with the band below price action confirming possible bullish breakout. As soon as we had two candlesticks breaking the Donchian Channels at the upper line, bulls started controlling the market.
For bearish breakout, we will be looking for a break below the lower line (band) of the Donchian channel to get a sell signal, and this breakout must be two consecutive bearish candlesticks for trade to take a sell entry and SuperTrend must be seen above price action with a red colour.
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From the chart above, we can see clearly how price action breaks the Donchian Channels indicator at the lower line and the two consecutive candlesticks appear to move little below the lower line and with the SuperTrend seen moving downwards with the band above price action confirming possible bearish breakout. As soon as we had two candlesticks breaking the Donchian Channels at the lower line, bears started controlling the market.
6. Do you see the effectiveness of combining two SuperTrend indicators (fast and slow) in cryptocurrency trading? Explain this based on a clear example. (Screenshot required))
Instead of adding another indicator to confirm signals, we can as well take a strategy of using two SuperTrend indicators with the first one being the default settings of (10-3) which will be the slow parameter. The second on with adjusted settings of (21-2) which will be the fast parameter. A buy signal is seen when the fast curve crosses the slow curve from below upwards and both curve turn green. A sell signal is seen when the fast curve returns below the slow curve with both emitting red colour. In all cases both curves should have the same colour.
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From the chart above, it is seen clearly that a buy signal was given when by the two curves when the fast curve crosses the slow curve from below upwards and both curves were in a colour of green. This phenomenon is seen as a confluence having confirmations from both curves and suggest a strong buy entry for traders.
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From the chart above, it is seen clearly that a sell signal was given when by the two curves, the fast curve returns below the slow curve and both curves were in a colour of red. This phenomenon is seen as a confluence having confirmations from both curves and suggest a strong sell position for traders.
We can see clearly the effectiveness of the SuperTrend indicator when we combine two curves with different period and multiplier. The two curves give a confluence which is great reason to have accept the signal given in our analysis. To always use the SuperTrend indicator alone without adding any indicator, it is much better and safe to always use this phenomenon in confirming signals.
7. Is it necessary to pair another indicator for this indicator to function better as a filter and to help eliminate false signals? Use a graph to support your answer. (screenshot required)
To always have certainty in our trade, there is the need to always combine indicators or indicator and any trading pattern to have a confluence and confirm signals to bring a better profit in or trades. For the purpose of this task, I will be combining the SuperTrend indicator with RSI which determine overbought and oversold of an asset.
Combining this two indicators will be good for little longer timeframe of 1 hour to 4 hours to have a greater precision of the SuperTrend indicator and have a good signal from the RSI indicator. First of all, the RSI indicator will have to read if the asset is overbought or oversold and the SuperTrend will follow to confirm signal of the RSI of which we can position ourselves to follow the direction of the trend.
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From the chart above, we can see that the RSI indicator read a signal of oversold which a reversal trend will be bullish and waiting patiently the SuperTrend confirmed the buy signal as price action move above the band and a green colour was emitted by the indicator. The two indicators confirmed a buy signal and gave a greater go for an entry position.
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From the chart above, we can see that the RSI indicator read a signal of overbought which a reversal trend will be bearish and waiting patiently the SuperTrend confirmed the sell signal as price action move below the band and a red colour was emitted by the indicator. The two indicators confirmed a sell signal and gave a greater go for an exit position.
With a little longer time frame as i mention already, the indicators will outweigh all the false signals and give a precise signals. After a signal from the RSI indicator, we should always wait patiently for the SuperTrend to confirm signal before we go on to enter or exit the market.
8. List the advantages and disadvantages of the SuperTrend indicator
ADVANTAGES
The indicator emit different colours for bullish and bearish trend making it easy for trend identification for even beginners.
The indicator can be adjusted for any timeframe and still be effective.
We can find reversal trend with the indicator with the help of the crossover of the lower and upper bands which emit different colours.
It work perfectly when combine with different indicators.
DISADVANTAGES
The indicator only identifies bullish and bearish market and can’t be used to identify ranging phase making more complex to use together with many trading patterns.
The indicator gives false signal when an asset market enters a ranging phase.
It can’t be used as a stand-alone and always advisable to combine with different indicators in confirming signals.
CONCLUSION
SuperTrend indicator is a trend following indicator just like other indicators that help traders to identify trend by emitting different colours for bullish and bearish trend. The indicator is in active in a ranging phase and only identifies trending mark. The indicator is very simple to use as the band s move below and above price action in determining directions.
The indicator can’t be used as a stand-alone indicator and can be seen how we combine it with Donchian channels in identifying breakouts. Also, we combine the SuperTrend indicator with RSI to confirm signals and make entry and exit points. No indicator is 100% perfect and we should always combine with different technical tools to confirm signal.