YinYangAlgorithms

Machine Learning: SuperTrend Strategy TP/SL [YinYangAlgorithms]

The SuperTrend is a very useful Indicator to display when trends have shifted based on the Average True Range (ATR). Its underlying ideology is to calculate the ATR using a fixed length and then multiply it by a factor to calculate the SuperTrend +/-. When the close crosses the SuperTrend it changes direction.

This Strategy features the Traditional SuperTrend Calculations with Machine Learning (ML) and Take Profit / Stop Loss applied to it. Using ML on the SuperTrend allows for the ability to sort data from previous SuperTrend calculations. We can filter the data so only previous SuperTrends that follow the same direction and are within the distance bounds of our k-Nearest Neighbour (KNN) will be added and then averaged. This average can either be achieved using a Mean or with an Exponential calculation which puts added weight on the initial source. Take Profits and Stop Losses are then added to the ML SuperTrend so it may capitalize on Momentum changes meanwhile remaining in the Trend during consolidation.

By applying Machine Learning logic and adding a Take Profit and Stop Loss to the Traditional SuperTrend, we may enhance its underlying calculations with potential to withhold the trend better. The main purpose of this Strategy is to minimize losses and false trend changes while maximizing gains. This may be achieved by quick reversals of trends where strategic small losses are taken before a large trend occurs with hopes of potentially occurring large gain. Due to this logic, the Win/Loss ratio of this Strategy may be quite poor as it may take many small marginal losses where there is consolidation. However, it may also take large gains and capitalize on strong momentum movements.

Tutorial:


In this example above, we can get an idea of what the default settings may achieve when there is momentum. It focuses on attempting to hit the Trailing Take Profit which moves in accord with the SuperTrend just with a multiplier added. When momentum occurs it helps push the SuperTrend within it, which on its own may act as a smaller Trailing Take Profit of its own accord.


We’ve highlighted some key points from the last example to better emphasize how it works. As you can see, the White Circle is where profit was taken from the ML SuperTrend simply from it attempting to switch to a Bullish (Buy) Trend. However, that was rejected almost immediately and we went back to our Bearish (Sell) Trend that ended up resulting in our Take Profit being hit (Yellow Circle). This Strategy aims to not only capitalize on the small profits from SuperTrend to SuperTrend but to also capitalize when the Momentum is so strong that the price moves X% away from the SuperTrend and is able to hit the Take Profit location. This Take Profit addition to this Strategy is crucial as momentum may change state shortly after such drastic price movements; and if we were to simply wait for it to come back to the SuperTrend, we may lose out on lots of potential profit.


If you refer to the Yellow Circle in this example, you’ll notice what was talked about in the Summary/Overview above. During periods of consolidation when there is little momentum and price movement and we don’t have any Stop Loss activated, you may see ‘Signal Flashing’. Signal Flashing is when there are Buy and Sell signals that keep switching back and forth. During this time you may be taking small losses. This is a normal part of this Strategy. When a signal has finally been confirmed by Momentum, is when this Strategy shines and may produce the profit you desire.


You may be wondering, what causes these jagged like patterns in the SuperTrend? It's due to the ML logic, and it may be a little confusing, but essentially what is happening is the Fast Moving SuperTrend and the Slow Moving SuperTrend are creating KNN Min and Max distances that are extreme due to (usually) parabolic movement. This causes fewer values to be added to and averaged within the ML and causes less smooth and more exponential drastic movements. This is completely normal, and one of the perks of using k-Nearest Neighbor for ML calculations. If you don’t know, the Min and Max Distance allowed is derived from the most recent(0 index of data array) to KNN Length. So only SuperTrend values that exhibit distances within these Min/Max will be allowed into the average.

Since the KNN ML logic can cause these exponential movements in the SuperTrend, they likewise affect its Take Profit. The Take Profit may benefit from this movement like displayed in the example above which helped it claim profit before then exhibiting upwards movement.


By default our Stop Loss Multiplier is kept quite low at 0.0000025. Keeping it low may help to reduce some Signal Flashing while not taking extra losses more so than not using it at all. However, if we increase it even more to say 0.005 like is shown in the example above. It can really help the trend keep momentum. Please note, although previous results don’t imply future results, at 0.0000025 Stop Loss we are currently exhibiting 69.27% profit while at 0.005 Stop Loss we are exhibiting 33.54% profit. This just goes to show that although there may be less Signal Flashing, it may not result in more profit.

We will conclude our Tutorial here. Hopefully this has given you some insight as to how Machine Learning, combined with Trailing Take Profit and Stop Loss may have positive effects on the SuperTrend when turned into a Strategy.

Settings:

SuperTrend:
  • ATR Length: ATR Length used to create the Original Supertrend.
  • Factor: Multiplier used to create the Original Supertrend.
  • Stop Loss Multiplier: 0 = Don't use Stop Loss. Stop loss can be useful for helping to prevent false signals but also may result in more loss when hit and less profit when switching trends.
  • Take Profit Multiplier: Take Profits can be useful within the Supertrend Strategy to stop the price reverting all the way to the Stop Loss once it's been profitable.

Machine Learning:
  • Only Factor Same Trend Direction: Very useful for ensuring that data used in KNN is not manipulated by different SuperTrend Directional data. Please note, it doesn't affect KNN Exponential.
  • Rationalized Source Type: Should we Rationalize only a specific source, All or None?
  • Machine Learning Type: Are we using a Simple ML Average, KNN Mean Average, KNN Exponential Average or None?
  • Machine Learning Smoothing Type: How should we smooth our Fast and Slow ML Datas to be used in our KNN Distance calculation? SMA, EMA or VWMA?
  • KNN Distance Type: We need to check if distance is within the KNN Min/Max distance, which distance checks are we using.
  • Machine Learning Length: How far back is our Machine Learning going to keep data for.
  • k-Nearest Neighbour (KNN) Length: How many k-Nearest Neighbours will we account for?
  • Fast ML Data Length: What is our Fast ML Length?? This is used with our Slow Length to create our KNN Distance.
  • Slow ML Data Length: What is our Slow ML Length?? This is used with our Fast Length to create our KNN Distance.

If you have any questions, comments, ideas or concerns please don't hesitate to contact us.

HAPPY TRADING!

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