Why the Supertrend is the Ultimate Crypto Trend Following Indicator
Having been around the markets in one form or another for more than a decade. I’ve tested pretty much every free indicator under the sun.
The Supertrend is a superior indicator for one simple reason: it adjusts based on the volatility of the market.
In crypto, volatility is your friend. Having a trend-following strategy that improves returns based on volatility is what you are looking for.
What is the Supertrend?
It’s not much different from a moving average except it accounts for volatility using the ATR (average true range) of a given price candle.
Here you can see the comparison over the same period, the supertrend adapts better to the dynamics of price action.
Supertrend Formula (in case you care about these things)
The formula is also pretty basic but it makes all the difference for timing entries (and exits).
Upper Band= (High+LOW/2)+Multiplier *ATR
Lower Band= (High+LOW/2)+Multiplier*ATR
ATR= [(Prior ATR*13)+Current TR/14]/14
ATR= Average True Range. This is simply a measure of volatility within a candle over a certain period (often referred to as “lookback”).
Why Use the Supertrend in Trading Crypto
Even as it craters in value from 3 trillion to less than 1 trillion, crypto is still an asymmetrically risk-positive trending asset.
In other words, for every dollar you risk, a net gain can be assumed over a given period of time (2 years or less). If you had put in 1 dollar at a random point in 2022 you are definitely not in profit. But from its nascent days of 2009, if you performed the same mathematical trick, you would likely be up many multiples from your initial investment.
The supertrend helps you stay in these asymmetrical trends longer than other indicators. The RSI, Bollinger Bands and even Moving Averages tend to give premature exit signals whereas the Supertrend keeps you in profitable trends for longer than other indicators.
Limitations of the Supertrend
The supertrend settings are subjective and the results random. Depending on when you start your backtest, and when you end it, your profitability will vary widely. In addition, the curve fitting which can occur by trying to find the perfect settings will surely lead to underperformance in a forward test environment. The best settings are a mirage, once you get that into your mind, the indicator becomes far more useful.
How to Profit from the Supertrend
Ok now that all the dirty boring stuff is out of the way. How can you make money trading with the supertrend?
As with anything, it depends on how you execute, and unfortunately, there is no binary approach(always In the market) to trading with the supertrend which will allow you to profit each and every time. People have tried and failed, to program the supertrend as a stand-alone trend following system. It simply doesn’t work.
This is where CoinRotator becomes incredibly useful. Identifying coins that are already trending against BTC, ETH and USDT.
The CoinRotator webapp will show you the freshness of the trend when searching for any altcoin in the top 1000+.
Once you find a coin you like in an UPtrend, you check how fresh it is on the coin page.
5 days old signal, a good sign for a Buy. At this point, you can head to your charts with the supertrend and try to find an intraday opportunity to buy ADA.
If you want to know more about how CoinRotator works you can check out the explainer video made just a few days ago.
What I am looking for is a pullback on a smaller time frame chart. If you are short on time looking at anything below the 4hr timeframe is simply gambling.
- Deep RSI Pullback
- Price remains above daily supertrend
- Price re-enters the bullish supertrend
The important takeaway here is that the higher time frame trend (in this case, the daily trend) remains intact. I want to see a healthy test lower and see price move back up.
If you’d like to get my template, feel free to drop the discord and it’ll be available. Nothing to pay or anything creepy like that, I just like to know who is using the setup and what they think of it.
Where do you sell?
My exit is kinda conservative but it works for me. It might require more patience than you are accustomed to. But I like to hold until there is a red close but in profit. What does this mean? Maybe a visual example will help.
Another option is to only sell half the position at these exit points and HODL the remainder until it hits a key resistance level, momentum begins to wane or the break-even stop gets hit.
What does waning momentum look like?
2)No new highs after X amount of candle closes
3)Price closes below the supertrend
Where to take losses?
Since not every trade is a winner with this strategy it's important to know when the trade has broken down and when to exit with a loss. Again, this is not a perfect scenario and every trade is different.
1)Wait for the CoinRotator screener to issue a DownTrend.
2)Check the daily supertrend on the coin you are tracking
3)Use a fixed percentage stop (least recommended)
Portfolio Management When Using the Supertrend for Entries
Since the Supertrend requires you to accept a larger amount of volatility it’s important to position size accordingly. Don’t ever go all in on a single signal you take.
Currently, I like to trade a basket of coins both long and short. CoinRotator app makes this is easy to manage. Each day there are fresh signals reported via the CoinRotator Telegram, Twitter or Discord bots.
This enables a steady flow of profits and losses that cannot blow up your trading capital.
Yes, your gains will be relatively small but so will your losses. And never forget, we are trading crypto because the general trend is higher prices (asymmetrical upside). At least for coins that are trending higher (which is easy to spot if you know where to look-hint hint!)
Hopefully, this shined some light on why the Supertrend is the ultimate trend-following indicator in a crypto trading environment and why it’s ultimately one of the best ways for a retail trader to extract profits from the market.
Thanks for reading!