The Degen's Guide to Supertrend Trading
Make the trend your bitch with Supertrend, avoid bull traps, never get chopped up again, and you might even make your mum proud of you in the process.
“The trend is your friend” is one of the most over-quoted axioms in trading, as trend following strategies are often very profitable over the long term. Crypto, in particular is a market that is prone to sustained high timeframe trends that can be extremely profitable to follow.
So, how can your garden variety hentai-for-brains CT degen know when a market is trending, and how can they know when to get in and out?
Let’s start with the basics
An uptrend is commonly defined as a series of higher highs (HH) and higher lows (HL).
A downtrend is the opposite, with lower highs (LH) and lower lows (LL).
Sideways, or ‘chop’, is directionless movement, generally with roughly equal lows and highs.
The objective of the trend trader is to catch the beginning of a trend, ride it up and exit as close to the top as possible. Common strategies for this involve moving averages, Ichimoku Cloud or simple price action.
The issue, with the above scenario, is that should a strategy be fast enough to catch those swing low/highs, well, then it’s going to get chopped up like crazy on the way up and will underperform a simple buy and hold strategy.
So what we want is a way of catching that swing at the bottom in a super aggressive way, and then chill TF out as we give price enough breathing room to print its peaks and troughs, but still manage to get out at the top.
How about something like this?
That indicator, Ladies & Gents, is the SuperTrend, and, whilst it doesn’t quite catch the entire move up, it does catch the vast bulk of it. In reality, no-one (outside of CT larpers) catches 100% of the move anyway. It’s factually impossible (short of having a time machine, or being large enough a player to dictate the tops and bottoms).
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How does the Supertrend Indicator work?
Supertrend works very similarly to a moving average, where signals are triggered when price closes above/below it. The smart aspect of this indicator is that its calculation is partially derived from the asset’s volatility, which gives price action enough breathing space not to get stopped out while it prints its highs and lows. Supertrend will loosen its stop level when volatility is increasing, but tightens it up when this is reducing, providing the trader with the best of both worlds.
A buy signal is generated when price closes above the Supertrend line and the indicator intuitively changes colour to green.
A sell signal is generated when price closes below the Supertrend line and it switches to red.
It’s also worth noting that the supertrend line is often a decent support/resistance level, and can be a great entry, as it’s so close to the invalidation point.
So far so good, however there are a few caveats. Primarily that Supertrend, being a trending indicator, gets chopped up pretty badly in sideways markets. On lower timeframes the chop would be bad enough to make the Pope swear, however this is reduced when using higher timeframes (12H+) .
One way to minimise false entries would be to use Average Directional Index (ADX) as a filter to confirm entries. ADX is a trend strength indicator that runs on a scale from 0 to 100.
NB: ADX is plotted as a single line, which will rise and fall based on trend strength regardless of trend direction. So a strong downtrend will print the same high numbers as an uptrend (i.e. it’s an index not an oscillator).
ADX 0-25: Weak or no trend
ADX 25-50: Stong trend - Enter when ADX is above this value
ADX 50-75: Very strong trend
ADX 75-100: Start speccing your Palmer Johnson brah
Let’s see how this works in practice:
Supertrend is a very easy indicator to configure, with only two inputs:
ATR Length - the lookback period in which to calculate volatility, or Average True Range.
Factor - this is simply a multiple of the above. Higher numbers loosen the Supertrend line, preventing it from getting chopped up, at the expense of later entries and exits.
I generally like to keep ATR at 10 or 14, but you should experiment with the factor to see what works best with your favourite dog coin. A factor of 2 will work with BTC (as it’s less volatile), but will get chopped to death on Shiba--Ape-Inu or whatever you degens are gambling on this week.
There you have it, I hope you enjoyed the read, and found it somewhat educational. At the very least I hope that it’ll help preserve capital and avoid you getting suckered into bull/bear traps.
This one was quite tedious to put together for some reason, so spreading the word would be much appreciated.
Best of luck;