This is a supertrend with a slightly twisted concept which can be very beneficial in strong trending markets to reduce stop loss distance and exit slightly quicker.
Link to the Indicator: Supertrend Ladder ATR
Concept of Supertrend Ladder ATR
When the instrument is trending up, regular ATR shows high values if there are big green candles. This affects the stop loss distance in regular supertrend which leads to wide stops or delayed lagging. When you are in a long trade, what matters for stop-loss is how much a negative candle can move within the bar. Hence, using ATR derived only based on red candles is more beneficial for trailing stops on long signals. The same applies to short trades where using ATR derived from only green candles is more efficient than overall ATR.
ATR will be minimal when the volatility is less and ATR will increase with volatility. That means, once you are in trade, the trailing of stop-loss also will vary based on ATR (or volatility). With regular ATR and supertrend, the chances of stop-loss distance widening are high with increased volatility even though stop-loss levels will not move down. This again poses the risk of higher drawdown during trade closure and also keeps the trade during ranging market. To avoid this, the second trick we are using here is only to reduce the atr stop-loss difference when in trade. That is, when in a long trade and negative candles ATR is increasing, we will not consider that. We will consider the new ATR only if it is lesser than the previous bar ATR.
The effect of these changes on the trending market is quite visual. Let's take example of USDTRY
Settings are quite simple and do not vary much from regular supertrend settings. Settings Include
- Moving Average and ATR multiplier settings.
- Options to calculate on closed candles
- Delayed trailing option