Have you ever heard the phrase the trend is your friend? As the name would suggest, the Supertrend indicator helps traders to find trends in the market. The indicator can be applied to analyse many asset classes across multiple timeframes. It’s especially popular amongst forex and stock traders. Here’s how you can start using the Supertrend indicator too.
How to find the Supertrend indicator?
The Supertrend indicator is a popular tool, and it’s easy to find for most trading platforms. For instance, it’s pre-installed in the cTrader platform. You can easily find a custom indicator for MT4 or MT5 on the MQL5 site. There are dozens of user-developed versions from the Tradingview community.
If you want help installing or configuring your Supertrend indicator, refer to our earlier article: Supertrend indicator explained.
As the indicator is often a trading platform add-on developed by third-parties, it often lacks clear instructions on how to trade using the indicator. In this article, we’re going to assess how to use the Supertrend indicator effectively in your trading strategy.
How to trade with Supertrend signals
Understanding the Supertrend indicator is incredibly simple. However, it doesn’t necessarily make trading simpler. There are many more dimensions to trading than merely knowing the direction of the trend.
Determine the trade direction
If the indicator is plotted below the candlesticks, it signals a bullish trend. Whereas if the indicator is plotted above the candlesticks, it signals a bearish trend. In most cases, the indicator is also coloured green or red to signal either bullish or bearish trends.
Do not launch your trading application, notice a green Supertrend line, and instinctively place a buy order. The indicator does not remove the need for strategy or technique.
If you’re trading on smaller timeframes, such as 1-hour, you should aim to use fresh signals to prevent getting into a trade near the end of the trend and risk drawdown before the indicator flips to a bearish signal. The best time to enter a position is during the first candle, but you can add additional requirements to determine your entry point, such as a
If you’re using longer timeframes, such as daily charts, you may be waiting too long to see a trend change, which means you’ll need to identify a strategic entry point to prevent drawdown. A good technique is to
There are a few techniques for exiting trades generated by the Supertrend indicator.
Firstly, you can wait for the indicator to flip from bullish to bearish and vice versa. This exit technique is straightforward; the indicator has told you the trend has changed direction, and it’s time to exit the position. The downside is the market could have moved against you, causing you to lose potential profits if you closed earlier.
Secondly, you can use a trailing stop-loss to trail by a fixed number of pips or based on the ATR, meaning the stop-loss automatically adjusts according to volatility. A trailing stop-loss can help to preserve or even maximise gains. At the same time, it could get you out of a position while the market continues to trend.
Thirdly, you can use a strategy entirely unrelated to the Supertrend indicator, for example, placing take-profit and stop-loss orders at key levels.
By default, the Supertrend indicator uses 10 periods and a multiplier of 3. You can lower these values, which makes the indicator more sensitive, thus generating more signals.
Lower sensitivity, especially on lower timeframes, can lead to many false signals. Consider that if you apply the indicator to a 5-minute chart with a setting of 6 periods, the indicator is only analysing the past 30-minutes of price data.
Some traders plot two or three Supertrend indicators using different settings on the same chart. Doing this would allow you to compare signals generated by higher sensitivity settings against more conservative settings.
Advantages of the Supertrend indicator
- The indicator is quick and easy to interpret, allowing traders to respond swiftly to trend changes.
- It combines various significant metrics, such as the Average True Range. Some variations may include Commodity Channel Index or Moving Averages into their calculations but display them easily to interpret line on the chart.
- The Supertrend can use it on any product and time frame.
- Settings are easy to adjust, making it possible to fine-tune and optimise for the best performance.
Disadvantages of the Supertrend indicator
- The simplicity of the Supertrend indicator can lull traders into a false sense of security, causing them to ignore other factors when making trading decisions.
- It is a lagging indicator, which means traders could leave many pips behind before it alerts you to a shift in trend.
- The indicator does not perform well in all conditions. Smaller timeframes such as 15-minutes or lower have less defined trends.
- By design, the Supertrend indicator always produces a signal, which is inherently flawed as a market cannot be in a perpetual state of a trend.