Supertrend Indicator: Good For Timing Bitcoin?

The supertrend indicator is touted as a top tool for spotting the trend of an investment. In this guide, you’ll learn what it is, how it works, and whether it’s any good for timing bitcoin’s moves. 

What’s the supertrend indicator?

It’s all in the name: The supertrend indicator is a technical tool that traders use to gauge the bigger trend of an investment. The basic idea is to buy the asset when the trend turns up, and sell (or short) it when the trend turns down. Simple enough.

You can find the indicator on TradingView by searching for it in the “indicators” section. You can then click “SuperTrend”, coded by Kıvanç Özbilgiç. 

Side note: the original supertrend concept is commonly attributed to a French trader named Oliver Seban.

I’ve added the SuperTrend indicator to the bitcoin 1-week chart to focus on the long-term trend. As you can see in the chart below, it does a good job of diagnosing bitcoin’s general direction.

For the most part, green is bullish and red is bearish. 

How does the supertrend indicator work?

Supertrend might look like simple red and green lines in the chart, but it’s based on a good deal of maths. Here’s the gist of how supertrend is calculated in 3 steps.

Step 1: Find the Average True Range (ATR) to determine the investment’s volatility. 

The ATR measures the average price range between the high and low over a period of time (usually the last 14 trading periods). When the ATR is high, the price ranges are big, and there’s more volatility. It’s the opposite when the ATR is low. 

The next chart shows the ATR (yellow line) moving up and down with Bitcoin’s volatility since 2017. As it’s a weekly chart, the ATR is based on the average price ranges over the past 14 weeks.

Side note: The ATR says nothing about price direction – it only measures volatility. But when you get a divergence between them, it can be a sign of a price trend slowing down, or even reversing. You can learn about divergences in my technical analysis course.

Step 2: Plug the ATR value into the supertrend formula. 

Here’s the formula below. There’s an adjustable “multiplier” to make the indicator more (or less) sensitive:

Uptrend (green line): [(High + Low) / 2] – (Multiplier x ATR)

Downtrend (red line): [(High + Low) / 2] + (Multiplier x ATR)

Fortunately, charting tools like TradingView do all the maths for us.

Step 3: Identify “buy” or “sell” signals.

The supertrend indicator gives a “buy” signal when the line turns from red (downtrend) to green (uptrend). That happens when the price ends a trading period above the red line. And as for the “sell” signal, you get that when the line turns green – with the price ending a trading period below the green line.

How do supertrend’s results stack up for bitcoin?

To answer this question, I back-tested the indicator’s results for bitcoin since October 2013 to get about a decade’s worth of results. To do that, I took the original code for the SuperTrend indicator from TradingView and turned it into a testable strategy (with some help from Chat GPT-4). 

Here are a few performance highlights:

• The signal has fired 11 times since 2013, with 6 “buy” signals and 5 “sell short” signals. 
• Of those 11 trades, there were 6 wins, 4 losses, and 1 is still undecided (the January 2023 buy trade is still open).
• The biggest winning trade made 2,528% (long July 2015 to May 2018).
• The biggest losing trade lost 57% (short May 2021 to November 2021).

Of course, these stats only show the end result of each trade – they don’t show how your portfolio would’ve looked day to day. So, I exported the trade data from TradingView and made a chart in Google Sheets to show just that. 

The chart below compares $100 invested into the supertrend strategy (yellow) vs. buying and holding bitcoin (blue), in October 2013.

At first glance, it seems like the strategy did well over the past 10 years – beating buy and hold overall. But as you can see in the chart above, the wheels came off in May of 2021, and the strategy is down around 94% since then. And, yes, the table below shows bitcoin’s worst-case loss at around 91%. But that happened in 2014, and bitcoin was way more volatile back then…

Three issues with using the supertrend strategy for bitcoin 

Apart from its poor performance in recent years, the supertrend strategy has a few other risks to keep in mind.

First, you’re always in a trade. The strategy constantly flips from long to short, meaning you’re always in the market. This creates a lot of risks, as sometimes it’s better to be “out the market” than in a trade. 

Second, you don’t buy low and sell high. The strategy usually only gets a buy signal after a big move higher on the price. And it usually only gets a sell signal after a big move down in the price. This makes it impossible to set your stop-loss close to your entry price.

And with a strategy that shorts bitcoin, you’re going to need a stop-loss!

Third, back-testing is highly subjective. I’ve back-tested the strategy over the past 10 years, and it did beat bitcoin in terms of growth. But if I’d only back-tested it over the past 2 years, it would have been a very different story!

Not to mention, the back-test doesn’t account for trading fees, bad entries, and slippage. Also keep in mind that for going short, you’d need to use leverage. So you’d likely pay huge funding costs to stay in your trade. 

Wrapping up: is the supertrend indicator good for trading bitcoin?

Using the supertrend indicator as your sole bitcoin strategy seems like risky business to me. So personally, I don’t use it as a buy or sell signal. That said, the indicator does an OK job of gauging the general trend of bitcoin. So, I might use it as part of my analysis sometimes. 

But to use it for an actual trading strategy, you need risk management, and that’s where it falls short.

There’s no magic indicator in trading. Your best bet is to learn how to use technical analysis to give you a more holistic approach. As usual, none of this is investment advice.

Key Takeaways:

• Supertrend’s good for spotting bitcoin’s major trends, but it’s risky as a trading strategy.
• The Average True Range (ATR) measures price volatility, and it’s part of the supertrend formula.
• Don’t follow supertrend blindy. Mix it up with other tools for a complete picture.