Most modern traders use what are known as technical indicators to help them make sense of what otherwise might appear to be random price movements. Are prices trending upwards, downwards, or drifting sideways? It is not always apparent from just looking at the figures. Separating the signal from the noise is challenging.
Fortunately, we can use mathematics to help us out. Technical analysis focuses on two variables, price and volume. It analyses these in terms of how supply and demand for a security affect price, volume, and volatility. The primary paradigm is that historical data is useful in assessing future movements. Technical analysis is based on three assumptions:
- Prices already discount the fundamentals of the instrument, the market, and the current sentiment.
- Prices move in trends rather than fluctuating randomly.
- Historical patterns tend to repeat.
The challenge is to analyse the data statistically and to develop models that help us make optimum decisions regarding the best moments to go long and to short. Many such models have been devised, but here we are looking at a particularly important one: the Supertrend indicator
The Supertrend indicator is one of the families of trend indicators that we use to analyse whether a market is moving up, down or sideways over time. It is one of the more simple indicators, signifying the underlying price movement.
The indicator was originally developed by Olivier Seban, who used it to great effect. Author of “Everyone Deserves to be Rich”, Seban became a millionaire by his thirty-second birthday and went on to make enough money to retire just three years later. Clearly, he is worth listening to.
Here is how the Supertrend indicator looks on the MT4 platform on the EUR/GBP pair:
When the chart goes green and is shown below the candlesticks, the trend is showing as bullish, and when it flips to red and appears above the candlesticks, the trend is showing as bearish.
Finding the Supertrend Indicator
As it not one of the more commonly-used indicators, the Supertrend Indicator is not normally on the MT4 or broker’s web platforms as standard. To add it to MT4, first you want to go here to download the indicator.
Then you can add it to your MT4 platform by clicking File > Open data folder > MQL4 and then transferring the Supertrend indicator download into the Indicators folder on MT4.
To then add it to a forex pair or instrument you are trading, choose the relevant chart and then click insert > indicators > custom > Supertrend indicator.
It will then be added to the relevant chart and you will be ready to start using it to assist you with your trading.
Using the Supertrend Indicator
Fortunately, using the indicator is very simple. First up, you can select the timeframe you want to trade on. If you are intraday trading, you may wish to set the time interval to 10 minutes. The default settings for the Supertrend indicator are 10 (the period for the ATR) and 3 (for the multiplier) and in most instances it is best to stick to these settings.
The Supertrend indicator is perhaps most useful when indicating a change of trend over a longer timeframe, particularly when there has been an extended period of flat price movement or after a long trend that has reached a point of resistance/support and is turning in the other direction.
You can also use it to set stop losses or take profit levels by identifying the high and low points of the indicator over relevant periods of time as the indicator gives a “big picture” view of trends.
The Supertrend indicator works well when prices are trending, but it can produce false signals over the shorter timeframes or in volatile markets. As ever, it is often advisable to use an indicator with reference to other indicators rather than in isolation.
The Technical Bit
The Supertrend indicator is based on a variation of the Average True Range (ATR) which measures volatility by calculating a moving average of true ranges over a specified time range, usually 14 days. The true range is either the current high minus the current low; the absolute value of the current high minus the previous close; or the absolute value of the current low less the previous close – whichever has the greatest value.
The Supertrend indicator calculates Up and Down values using:
Up = (HIGH + LOW) / 2 + Multiplier x ATR
Down = (HIGH + LOW) / 2 – Multiplier x ATR
Usually, the multiplier used is 3.
When the trend flips from up to down, the colour of the indicator flips from green to red. Also, the line moves from below to above the candlesticks.
When used with other indicators, the Supertrend indicator is a useful tool. It is easy to use and intuitive. While it works well in a trending market, it tends to fail when there are a lot of short price fluctuations and in highly volatile markets.
The contents of this website are intended for educational and information purposes only and do not constitute any form of advice or recommendation and are not intended to be relied upon by you in making (or refraining to make) any specific investment or other decisions. Appropriate expert independent advice should be obtained before making any such decision. We cannot and do not offer individual investment advice.