Supertrend Indicator: Trading Strategy and Best Settings

As traders, most of our analysis centers around knowing the trend, where to get into the market, and where to exit the market. While there are a thousand and one ways to do this in the market, using the super trend indicator is one of the most effective.

This article will cover everything you need to know to get started using this indicator. So, let’s get to it.

What is the Supertrend Indicator?

Developed by Olivier Seban, the Supertrend combines trend detection with volatility based on the Average True Range (ATR) indicator. This combination allows the indicator to signal changes in trend direction and assist in positioning stop-loss orders.

Technically, the Supertrend Indicator is a trend-following tool used in technical analysis for trading. Functionally, it is overlaid on a trading chart, where its plots indicate the current trend direction. The Supertrend is versatile in application, as it can be used with various time frames like daily, weekly, or intraday and across different trading instruments, including stocks, futures, or forex.

The mechanics of the Supertrend technical analysis indicator are similar to moving averages. It is typically represented alongside the price on a chart, with its position relative to the price indicating the prevailing trend. The core of this indicator is built on just two parameters: the multiplier and the period. This simplicity in design makes it a fundamental yet effective technical analysis tool for traders.

As you can see in the chart above, the interpretation of the Supertrend indicator is extremely simple. The indicator presents a green line when the market’s trend is bullish and a red line when the market’s trend is bearish. This data is based on a predefined number of previous candlesticks’ closing prices, which can give a strong indication of the market’s sentiment.

Why is the Supertrend Indicator Useful for Traders?

The Supertrend indicator is important to traders for several reasons:

1. Trend Identification

It helps traders easily identify the current trend direction. Since the indicator adjusts to volatility, it provides a clear visual cue on whether the market is trending up or down, making it easier to align trades with the prevailing trend.

2. Adaptive to Volatility

Unlike fixed-period moving averages, the Supertrend uses the ATR (Average True Range) to adapt to changing market volatility. This means it can adjust its threshold levels to be more or less sensitive depending on market conditions, reducing the likelihood of false signals during periods of high or low volatility.

3. Clear Entry and Exit Signals

The Supertrend indicator provides straightforward buy and sell signals based on crossovers. When the price crosses above the Supertrend line, it signals a potential buying opportunity, while a cross below the line suggests a selling opportunity. This simplicity can help traders make quick decisions.

4. Support and Resistance Levels

The Supertrend line often acts as a dynamic support or resistance level. During an uptrend, it can act as a support level, while in a downtrend, it can serve as resistance. Traders can use these levels to set stop-loss orders or determine entry points.

5. Reduction of Noise

The indicator helps filter out market noise and focus on the underlying trend. By smoothing out price fluctuations with the ATR, it can help traders avoid reacting to short-term price movements that might not reflect the broader trend.

6. Versatility

The Supertrend indicator can be used across various time frames and markets. Its adaptability makes it useful for both short-term trading and longer-term investing strategies. Traders can adjust the ATR multiplier to fine-tune the indicator to their specific trading style and time frame.

7. Trend Reversals

It helps in identifying potential trend reversals. When the Supertrend line changes direction, it can signal a potential change in the market trend, providing traders with an opportunity to adjust their positions accordingly.

How to Use the Supertrend Indicator in Trading?

Like other indicators, there are endless ways to use the Supertrend indicator. Along the way, you may find your own way to find trading opportunities using this indicator; however, there are several common ways you can start using the Supertrend indicator in your everyday analyses. Here are some of them:

1. Identifying Trends

Primarily, the Supertrend indicator offers a clear view of market trends. As the name implies, the Supertrend is there to help you identify the strength of a price trend. 

When the price consistently stays above the Supertrend line, it signals an uptrend, suggesting that the asset’s price may continue rising. On the other hand, a price below the line indicates a downtrend, indicating a likely fall in the asset’s price​​.

More importantly, as you can see in the gold chart below, the bands of the Supertrend indicator tend to narrow when there is a strong trend and widen when the market is consolidating. 

2. Discovering Entry and Exit Points

When using the Supertrend technical indicator, traders can also spot potential buy and sell signals with the Supertrend indicator. The technique is pretty simple – A price pullback to the line in an uptrend or a rally to the line in a downtrend can indicate temporary dips or retracements in the trend, offering entry and exit signals. It is, therefore, an excellent indicator for those who utilize the pullback trading strategy or the counter-trend strategy.

3. Setting Trailing Stoploss 

The Supertrend lines can be used for setting dynamic trailing stops. For instance, in an uptrend, traders might trail their stop loss along the rising lower Supertrend line, adjusting it as the trend continues​​. This technique is particularly useful for those who wish to automate their trading.

Identifying Market Reversals 

Finally, since the supertrend indicator is a trend-following indicator, it can also help you identify trend reversals. Normally, the price is likely to hit the upper or lower bands when the existing trend is about to reverse. But, to increase the chances of success and to determine overbought or oversold market conditions, the Supertrend indicator can be effectively combined with the Relative Strength Index (RSI). This combination helps confirm Supertrend signals and helps us anticipate a reversal.

The Supertrend Indicator Trading Strategy Tutorial

Now that we understand the supertrend indicator and how it works, let’s take a step further and use our newfound knowledge to analyze a real chart.

Before we dive into the example, remember that the Supertrend indicator can work on any timeframe. So, in this case, we will be using it in the 15-minute timeframe on EUR/USD. Like most technical indicators, the Supertrend Indicator works best with another indicator. In this case, we will use it alongside the 50 Exponential Moving Average (EMA) indicator.

First, let’s add the two indicators on a price chart:

After setting up our chart, it’s good to understand how the strategy works. The first thing is to determine the trend. The chart above shows that the Supertrend indicator is green, telling us that the trend is bullish. In this case, we are preparing to enter a long position.

As you can see, upon using the upertrend indicator’s signals, we can notice that buying pressure is building up. As the price breaks above a tight support and resistance level and the previous swing high, a buy signal is given.

Now that we know the trend, it’s time to plan our entries, and that’s where the 50 EMA comes in. As you can see in the chart below, to enter a long trade, we simply have to wait for the price to pull back to the 50 EMA indicator, as shown above. In a very strong trend, we can have many opportunities to enter new positions as the price continuously pulls back to the 50 EMA, as shown in the chart below.

That’s it. As you can see, integrating the supertrend in your trading strategies can clearly help you find trade opportunities. It is a user-friendly indicator that is often known as highly accurate and reliable, especially when used in conjunction with other indicators.

What are the Benefits and Limitations of the Supertrend Indicator?

The Supertrend Indicator is celebrated for its simplicity and efficacy in trend identification in trading. Despite its advantages, the Supertrend Indicator does have some limitations. Let’s take a closer look at them.

Benefits of Using the Supertrend Indicator 

A major benefit of the super trend indicator is its ease of interpretation; even beginners find its calculation and presentation straightforward. This user-friendliness extends to the configuration, as it involves a minimal number of input variables, allowing traders to tailor it to their specific needs with relative ease.

Limitations of the Supertrend Indicator

Its primary drawback is being a lagging indicator, meaning it provides signals after the trend has already started. This delay can sometimes lead to missed opportunities or late entries in the market. Additionally, it relies on only two parameters (multiplier and period length), which may not always be sufficient to predict market movements under all conditions.

Key Takeaways

Frequently Asked Questions About the Supertrend Indicator

Here are some frequently asked questions about the Supertrend indicator:

Is Supertrend a lagging indicator?

Yes, the Supertrend is a lagging indicator. This means it tends to provide signals after the trend has already begun, which is typical of indicators that use historical data to project future trends.

Does a Supertrend indicator work?

The Supertrend indicator does work, particularly in trending markets. It is known for accurately identifying trend directions and providing potential buy or sell signals. However, its effectiveness can vary depending on market conditions and the traded asset.

What is the best time frame for a Supertrend indicator?

The best time frame for a Supertrend indicator can vary depending on the trader’s style and objectives. It is versatile and can be used in any timeframe, from intraday to daily, weekly, or even longer. Traders often tailor the time frame to suit their individual trading strategies and the market dynamics of their specific asset.