Understand and Trading with Supertrend Indicator || Crypto Academy /S5W7-Homework Post for kouba01
This is another informative and lecture on the Supertrend indicators. Supertrend is an effective indicator among other indicators. I have learned that how to trade with this indicator. So, try to explain this indicator. I hope, it will help you understand this indicator in trading.
Show your understanding of the SuperTrend as a trading indicator and how it is calculated?
In trading, there are many indicators available in the market for doing technical analyses of a particular asset. As we learned in the previous classes that there are three types of indicators. One type is a trend following indicator. There are many trend-following indicators the Supertrend indicator is one of them.
The most experienced and professional traders recommend trading when the market is on-trend. There is a saying in which they say that Trend is your Friend. So, to do trading with the trend, the Supertrend in an indicator is a well-known trend following indicator in the market.
Supertrend indicator is used to determine the current trend in the market. It is also used to determine the buy and sell opportunities. We can easily determine the current trend of the market. We will discuss both the buy and sell scenarios in further questions. It produced good results when the trend strength. It is comprised of two colors green and red that are by default colors. We can change them accordingly.
In the above figure, you can see what how Supertrend indicator looks like. It is a very simple indicator that is comprised of one more indicator Average True Range. Now we will discuss how the Supertrend indicator is calculated.
How Supertrend Indicator is calculated?
When we understand the calculation of a particular indicator first, we need the elements that are included. In the Supertrend indicator, then there are two elements are included, one the ATR indicator and another is the multiplier.
ATR is used to determine the average value of the market that can fluctuate in both upward and downward directions. Traders use this indicator to set the stop loss and take profit level in trading. ATR indicator is included in the Supertrend indicator to make it more effective and get signals of buying and selling.
Two results are displayed by the Supertrend indicator. One is for the uptrend market and the second for the downtrend market. The ATR is the main part of this indicator. ATR is also calculated from the True Range indicator. We will calculate the ATR and TR values in the previous lectures. Now, we only focus to calculate the Supertrend indicator. Here is the formula of Downtrend and Uptrend.
Upper Band = (high + low) / 2 - (offset multiplier) x ATR (period)
Lower Band = (high + low) / 2 + (offset multiplier) x ATR (period)
In the uptrend indicator value, we add the current candle high and low value then divide the result of addition by 2. Next, we Multiply the offset value with the current ATR value and at the end, we subtract them to the division result. In this way, the uptrend value of the indicator is shown on the chart. When bullish market the indicator is below the price action. That is why we subtract the result.
In the downtrend indicator value, we add the current candle high and low value then divide the result of addition by 2. Next, we Multiply the offset value with the current ATR value and at the end, we add them to the division result. In this way, the uptrend value of the indicator is shown on the chart.
The offset or multiplier can be changed according to the trading strategy. It basically defines the distance between the price action and indicator. The default value of the multiplier is 3 in the Supertrend indicator. When we increase it, then we get smooth results.
In the following figure, I calculate the current value of Supertrend value with an illustrative example. You can see that; I open the chart and apply the only ATR value with 10 lengths. The current Value of ATR = 861.37. When we notice the low and high of the current candle then the High= 47795.16 and Low = 46596.00.
Current ATR = 861.37
Current High= 47795.16
Current Low = 46596.00
We have all the values of the formula. Now, we put all these values into the formula and calculate the current Supertrend value.
Upper Band = (high + low) / 2 + (offset multiplier x ATR)
Upper Band = (((47795.16 + 46596.00) / 2) + (3 x 861.37))
Upper Band = ((94391.16 / 2) + (3 x 861.37))
Upper Band = (47195.58 + (3 x 861.37))
Upper Band = (47195.58 + 2584.11)
You can see in the above figure, that we calculate the upper band value of the SuperTrend indicator. The same value is calculated by the formula. When the Supertrend indicator is value is above the price action then the market is on a downtrend.
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 major parameters of the Supertrend indicator are ATR and offset multipliers. ATR is also an indicator that we used to calculate the value of the Supertrend indicator. ATR calculates the average value of the market. It means that it predicts the possible fluctuation of the market in both directions according to the previous movement of price.
The offset multiplier is used for the distance between the indicator and the price action. We can increase and decrease the smooth result with this multiplier. The default multiplier is 3. We can customize this value according to our choice. When we want to do short-term trading, then we need to set a short time period of ATR and a small value of the multiplier. On contrary, when we want to do long-term trading, we need to do trading with a large length.
How to Customize the Supertrend indicator?
We can add the Supertrend indicator to the chart on the tradingview.com site. We can change the settings of the Supertrend indicator according to our choice. We can do that very easily go doing simple steps. If you want to add and change the settings of the indicator, then you need to do the following steps.
- Go to the TradingVieiw.com website and open the chart of any asset.
- Click on the fx indicator button as mentioned in the chart.
- Next, write the name of the indicator as Supertrend. Then click on the first result.
In this way, we can add the indicator to the chart. Now, we can change the settings of the indicator. There are two major settings of the indicator. To open the settings, click on the settings icon mentioned in the figure.
Input
In this setting, we can change the period length of the indicator. The default period length of ATR is 10. We can change according to our choice. Next, we can change the factor or multiplier number according to our trading style.
Style
Style setting is all about the appearance of indicators. We can change the color upper and lower band of the indicator. The default color is red and green. We can also change the background of the indicator to increase the visualization of the indicator.
Is it advisable to change the default settings of the Supertrend indicator.
Changing the settings of indicators is depend on the traders. If the trader is experiencing then he can change the indicator settings according to his trading strategy. Because, experienced traders know that, how to trade with indicators with different settings. Some trader wants to do short-term trading then they can change the period length setting to short-term style.
On contrary, if traders want to do long-term trading, then they change the setting according to the long-term trading style. If a trader is a novice and does not have enough experience in trading, then it is not advisable to change the default settings. Because the default settings are set after deep analyses.
According to my perception, the default settings are not suitable for every trading style and category. If we want to do the long-term trading then, we need to change the settings of the indicator. Because the default settings are lies between the long-term and short-term trading category. It produced several false signals. So, it is advisable to change the settings of the Supertrend indicator. It is for those who have enough knowledge of trading.
Based on the use of the Supertrend indicator, how can one predict whether the trend will be bullish or bearish (screenshot required)
As we discussed above, the Supertrend indicator is a trend-based indicator. Its main purpose is to determine the current trend in the market. The Supertrend indicator determines the two types of trends, one is a bullish trend and the second is a bearish trend. It does not shows a ranging market signal.
Bullish Trend
When the indicator is lying under the price action, and the price moves upward direction, then wan can say the market is in a bullish trend. We can understand simply by observing the colors indicator. When indicator line below in the price of market and color is green (default color). Then the market is on an uptrend.
In the above figure, you can see that the indicator line is below the price action and the price moving upward direction. The color of the indicator is green. It is indicating a bullish trend.
Bearish Trend
When the indicator is lying above the price action, and the price moves downward direction, then we can say the market is in a bearish trend. When the indicator line is below the price of the market and the color is red (default color) and the price moves downward direction, then the market is on a downtrend.
You can see in the above figure, that the indicator line is above the price action, and the price moves downward direction. The color of the indicator is red. It is indicating the bearish trend.
Explain how the Supertrend indicator is also used to understand sell / buy signals, by analysing its different movements.
Supertrend indicator is also used to determine the buy and sell opportunities. We can figure the buy and sell signals by observing the change in the position of the indicator line and the change in the color of the indicator. When the trend is strong, the indicator shows better results.
Buy Signals
Buy signals are determined by the Supertrend indicator. When the market is on a downtrend and the color of the indicator is red, then the indicator changes its color and direction. It moves from topside to bottom side and the color of the indicator becomes green. When the color indicator becomes changed and the indicator line below the price, then it indicates the buy signal.
We can see in the above figure when the indicator changes its position from top to bottom and the color of the indicator becomes green. It indicates the buy signal. We can notice that after the buy signal the market is on an uptrend. In this way, we can book reasonable profit using this indicator.
Sell Signals
Sell signals are determined by the Supertrend indicator. When the market is on an Uptrend and the color of the indicator is green, then the indicator changes its color and direction. It moves from the bottom side to the top side and the color of the indicator becomes red. When the color indicator becomes changed and the indicator line above the price, then it indicates the sell signal.
In the above figure, you can see that, when the indicator changes its position from bottom to top, and color of the indicator becomes red. It indicates the sell signal. We can notice that after the sell signal the market is on a downtrend. In this way, we can book reasonable profit and avoid enough loss using this indicator.
How can we determine breakout points using Supertrend and Donchian Channel indicators? Explain this based on a clear example.
Donchain indicator is with Supertrend indicator as a conjunction. It is used to confirm both buy and sell signals under certain conditions. When we apply both indicators on the chart, we need to observe the particular condition. This condition is a breakout of price candles to the upper and lower band of the Donchain indicator. This breakout happens both in between the trend and when the trend reversals start.
Bearish Breakout
In the bearish breakout, we need to observe the price of candles and the lower band movement. When the two consecutive bearish candles cross the lower band line of the Donchain indicator from the upside to bottom direction, then it indicates the bearish breakout. It confirms the sell signal. After that signal, the market will be on a downtrend.
According to the Supertrend indicator, the market just changes the direction from bullish to bearish. You can notice that the two consecutive bearish candles break the lower band of Donchain. It confirms the sell signal. Here we need to sell order. Because, after this breakout, the market surely be on a downtrend.
Bullish Breakout
First, we need to apply both indicators on the chart. Then we need to observe the price of candles and the upper band movement. When the two consecutive bullish candles cross the upper band line of the Donchain indicator from the bottom to the upward direction, then this indicates the bullish breakout. It confirms the buy signal.
In the above figure, you can see that both indicators are applied on the chart. According to the Supertrend indicator, the market is on an uptrend. You can notice that the two consecutive bullish candles break the upper band of Donchain. It confirms the buy signal. Here we need to buy order. Because, after this breakout, the market surely be on an uptrend.
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))
We can use Supertrend indicators twice at one chart different parameters to confirm the trading signals. In this, we set the one Supertrend indicator with a small length and the second Supertrend indicator set with a higher length value. By using the same indicator with different parameters, we can filter and confirms the buying and selling signals.
In this, we set the 1st Supertrend indicator length setting to 10 and the multiplier set to 3. In the 2nd Supertrend indicator length setting is set to 21 and set the multiplier to 2. In this way, the two indicators are applied with different parameters.
I change the style setting one (21, 2) indicator. The upper band color is purple and the lower band color is blue. In this way, can easily identify both indicators. You can in the figure, both indicators with different input and style settings.
When both indicator lines made a crossover in either direction then it indicates the confirmation of signals. When the Supertrend (10, 3) indicator crosses the Supertrend (21, 2) indicator line from top to bottom, then it confirms the buy signal. You can see in the following figure, I mentioned two places where the cross is made. After the cross, the market is on an uptrend.
When the Supertrend (10, 3) indicator crosses the Supertrend (21, 2) indicator line from the bottom to the upward direction, then it confirms the sell signal. You can see in the above figure, I mentioned two places where the cross is made. After the cross, the market is in a downtrend.
In this way, we can confirm the buy and sell signals using the same indicator with different settings. It is the same as we use the two EMA with 100 and 55 length settings.
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)
It is not advisable to use any indicator alone. We should use more than one indicator for trading. In this way, we can easily filter the false signals and confirm the right signals. For this purpose, I will use the EMA indicator (with a 50-length setting) to confirm the signals that are produced by the Supertrend indicator. We can also confirm the EMA indicator signals with the Supertrend indicator.
Confirmation of Buy Signals
In this, we will confirm the buy signals that are produced by the indicators. First, of all the Supertrend indicator produce a buy signal and at the same time, the EMA is made a cross with price action and changes his direction from upward to downward.
In the above figure, you can see that the Supertrend indicator produced a buy signal. We observed the movement of EMA, at the same time it also made a cross with price and change its direction. It confirms the buy signal that is produced by the Supertrend indicator. After confirming the signals, the market is on an uptrend.
Confirmation of Sell Signals
In this, we will confirm the sell signals that are produced by the indicators. First, of all the Supertrend indicator produce a buy signal and at the same time, the EMA is made a cross with price action and change his direction from bottom to upward.
We can notice in the above figure, that the Supertrend indicator produced a sell signal. We observed the movement of EMA, at the same time it also made a cross with price and change its direction. It confirms the sell signal that is produced by the Supertrend indicator. After confirming the signals, the market is a downtrend.
List the advantages and disadvantages of the Supertrend indicator:
There are a few advantages and disadvantages of the Supertrend indicators. We will discuss a few advantages and disadvantages in the following.
Advantages
- We can easily determine the current trend in the market.
- We can figure out the buying and selling opportunities by using the Supertrend indicator.
- The signals of the Supertrend indicator are very clear.
- It proves to be a very good indicator for long-term trading.
Disadvantages
- It is calculating his value from previous data that why; it produces wrong signals.
- It has no function of range market that’s why it shows many short trading signals.
- It works perfectly only when the trend is strong.
Supertrend indicator is used to determine the current trend in the market. It is used in trading to determine the buy and selling positions. There is another indicator that is involved in the calculation of the Average True Range.
It gives us two clear uptrend and downtrend signals. It does not indicate the sideways movement. When the indicator is below the price then the market is on an uptrend. When the indicator is on the upside of price then the market is on a downtrend.
The buy and sell positions are determined by observing the crossover and change in the direction of the indicator. When the indicator change direction from bottom to up then it indicates the buy opportunity and when changes to the bottom side then indicate the selling opportunity.
Respected Professor:
Professor: @kouba01
@yohan2on
Author: @noshi
Thank you for supporting this content @gunthertopp