Supertrend is a trend following indicator that is plotted on price and represents a continuous line that allows defining the current strong trend direction. This tool will also provide buy and sell signals that can be taken into consideration depending on the trading strategy.
You can easily find that it moves in line with the price of the underlying asset and can either be green (i.e. indicating an uptrend) or red (indicating a downtrend).
A Supertrend indicator or so called trend strength indicator can be used on all asset classes including equities, CFD or forex, and on all timeframes. Like any other indicator, Supertrend works with the best performance when it is used in a couple with other indicators or oscillators.
An important thing to understand is that the indicator does not predict the direction, rather as soon as the direction is established, it will guide you to open a position and defines it as worthless to stay in it till the trend maintains.
Figure 1. USDJPY H4 chart with Supertrend indicator
How does Supertrend indicator work?
The indicator is very simple to use and is calculated with the help of two inner indicators, selected by the user’s choice:
- Average True Range
- Standard Deviation
By default, the pre-defined one is the Average True Range. Being used in Supertrend, it takes into account the current volatility of the market. The ATR is adjusted using the period setting (the single parameter of ATR) which determines how sensitive the indicator is.
In its sense, ATR takes into consideration the previous high/low and close of a certain period in its calculations. For example, when the ATR period in the indicatorPeriod is set to 20, it means that the indicator is looking back at the highs and lows of 20 days.
That said, when current market volatility is high, then the ATR will be high as well. On the contrary, if there is little volatility, then the ATR will be low also.
A standard Deviation indicator can be chosen to define the trend as well. It works almost in the same way as ATR i.e. defines the deviation of the price from its mean during a specified time period.
It is up to the user which indicator to apply though they give quite similar results and the differences appear mainly in details.
Pros and Cons of the indicator
It is a famous fact that there is no ideal indicator that would have given 100 percent accuracy so the current tool has also its own positive and negative aspects. Among the main benefits of the indicator is the ability to help not to exit too early when the trend is going in your favor. The famous ‘trend is your friend’ proverb is not just words and it really is the key factor for getting consistent profits.
During the ranging periods, an indicator stays flat which is another handy feature. The majority of other tools are showing false signals when the market is in equilibrium while the Supertrend gives clear signs that there is no need to rush and place premature trades.
Another beneficial feature of the indicator that it might be used both for scalping and swing trading strategies. All traders have different approaches and hold trades for various periods of time therefore in the indicator it is possible just to change the indicator period setting to adjust the behavior of the indicator and to apply it for a particular trading style.
One of the most popular indicators on the Stock markets is VWAP that uses the volume of the asset in its calculations. An unfortunate factor of the Forex market is that its volume is almost impossible to calculate because of decentralization and the absence of a single exchange board. Therefore, VWAP could not be used but the Supertrend indicator is very similar to it in visual terms so you can easily use it instead.
Probably the main and only negative aspect of the indicator is that it sometimes could be slightly lagging because it has a period for calculations as all the indicators do. The aftermath of this obstacle might slightly cut off some profits gained from the overall movement. It is not a big problem in case if a long-term strong trend has been caught.
Beside the mentioned above period of the inner indicator (ATR or StdDev), that will be used, there are some others that allow to adjust the appearance of the Supertrend.
Figure 2. Parameters of Supertrend indicator
Among the most important ones there is a priceType variable that allows to set which one price type (Open, High, Low, Close, Weighted, etc) to use for calculations of the indicator. The selected price type significantly influences the appearance of the indicator so it is up to a user which one to chose.
By default, green (for uptrend) red (for downtrend) and blue (for trend change signals) colors are selected but they can be adjusted as desired.
Width of trend lines is as well changeable so it will not overlap the price chart itself in case if the small bars or candlesticks are used.
As every indicator by TradingKit, in Supertrend there are available alerts displayed in the terminal, when trend has changed. As well, PUSH mobile notifications for iOS and Android MetaTrader terminals are available also that allow not to sit in front of the monitor all day long to get a signal.
Examples of trading strategies
As stated earlier, the Supertrend indicator is plotted either above or below the price. One of the examples of how to use the indicator is when it moves below the price while the line is green, then it is a signal to open a buy position to get a trend continuation trend. If a Supertrend line closes above, while being red then the indicator shows a sell signal.
You will also note that there are circles that indicate the change of trend which may be another signal type of the Sypertrend indicator. It is as simple as the buy position should be opened when it is indicated that the bearish (red) trend changed to bullish (green). And vice versa, when the bullish trend changes to bearish, then the sell trade should be opened.
By the nature of this tool, during a trend, it shows firm support and resistance zones for traders that could use it to enter and exit trades. The way it works is, for example when the signal to buy is on and the price dips towards the indicator, it is a good place to enter long at this level. In opposite, when the sell signal is being generated and the price touches the indicator line, then it can act as a good resistance level.
Additionally, it provides signals for setting stop losses if the settings are set up correctly for the selected instrument. If you have opened long trade, then the stop-loss price can be placed at a level below the green line. If a short position is opened, then you can place it above the red line of the indicator.
Here is an example of how it could be used combined with some other indicators.
Figure 3. Supertrend indicator strategy
On the chart above the Supply and Demand indicator is attached on chart as well. The strategy sample is to enter longs when some fresh Demand zone has been formed and when the price crosses upwards the Supertrend line. There are marked several entry points with blue arrows that show some very good setups that could have led to decent profits. The opposite is applicable for short trades.
This software is fairly simple and easy-to-use, being as well very effective trading tool based on volatility.
It allows to follow the trend direction of the price on a certain asset and, if used properly, can become a valuable tool of making a decent income from trading not only on forex pairs but as well stocks, indices, and other asset classes.
The trader must spend some time with the indicator to define the best settings and timeframes to apply to a selected instrument to get the best possible results.