Not only identifying market trends, but the supertrend indicator also works to spot buy and sell potentials as well as dynamic stop-loss levels for better protection against the risk.

In the world of trading, you've probably heard the saying, "follow the trend." This phrase is pretty common in trading discussions and serves as a reminder, especially for beginners.

Why is it so important? Well, trading in the direction of the trend comes with several advantages. It increases your chances of success and often offers a better balance between risk and reward.

Now, if you want to follow the trend, a great tool to use is the Supertrend indicator. This indicator is excellent at showing you which way the trend is going and helps you figure out the best times to get in and out of trades.

But that's not all. You can also combine the Supertrader with other indicators like MACD, RSI, MA, or Stochastic to improve your trading results.

 

What Is Supertrend Indicator?

What is Supertrend Indicator

Supertrend is a trend-following indicator that relies on the Average True Range (ATR) for its calculations. What sets it apart is its ability to factor in market volatility, making its trend assessments more precise.

Supertrend will help you to spot the trend direction and potential entry or exit points. You can use it for a variety of financial markets, like forex, stocks, commodities, and cryptocurrencies.

 

Supertrend Indicator Formula

Here are the formulas for the Supertrend indicator:

Upper Line = (High – Low) / 2 + multiplier x ATR

Lower Line = (High – Low) / 2 - multiplier x ATR

Where:

  • High represents the peak price.
  • Low represents the lowest price.
  • ATR is the Average True Range

To calculate the ATR, use this formula:

ATR = ((previous ATR x 13) + current TR) / 14

 

How to Install Supertrend Indicator to MetaTrader?

The Supertrend indicator doesn't come pre-installed in MetaTrader platforms, so you'll need to install it yourself. To do this, you can follow the steps outlined below.

  1. Download the Supertrend Indicator file. You can download the indicator from MQL5, Earnforex, or Indicatorspot.
  2. Access the data folder in MetaTrader. You can do this via File -> Open Data Folder.
  3. Inside, locate the MQL4 or MQL5 folder.
  4. Now, simply copy all the folders from the downloaded archive and paste them directly into the MQL4 or MQL5 folder.
  5. After completing these steps, restart MetaTrader.

 

How to Use Supertrend Indicator?

To use the Supertrend indicator in your trading, you can follow the following guide.

 

Using  Supertrend Indicator in MetaTrader

  • Choose the chart and timeframe where you'd like to add this indicator.

  • Click the "Insert" option located at the top of the panel.
    How to Use Supertrend Indicator in MetaTrader 1


  • From there, pick "Indicators," then opt for "Custom", and finally, select "Supertrend".
    How to Use Supertrend Indicator in MetaTrader 2


  • A window for the Supertrend will pop up; simply click "OK".
    How to Use Supertrend Indicator in MetaTrader 3


  • Your indicator is now prepared for use.
    How to Use Supertrend Indicator in MetaTrader 4

 

Using Supertrend Indicator in Tradingview

  1. Open TradingView and select the chart you want to use.

  2. Click on the "Indicators" at the top of the screen.
    How to Use Supertrend Indicator in TradingView 1


  3. In the search box, type "Supertrend" and select it from the dropdown list.
    How to Use Supertrend Indicator in TradingView 2


  4. The Supertrend Indicator will be added to your chart.
    How to Use Supertrend Indicator in TradingView 3

 

Trading with Supertrend Indicator to Identify Trend

The Supertrend indicator helps identify trends in a more straightforward way. Just pay attention to the way it moves and how the color changes.

  • When the price drops below the indicator line, it turns red, signaling a downtrend.
  • On the flip side, when the price climbs above the line, the indicator turns green, indicating an uptrend.

Each time the price closes above or below the Supertrend, it signifies the start of a new trend.

Trading with Supertrend Indicator - Trend

 

Trading with Supertrend Indicator to Generate Buy and Sell Signals

The Supertrend indicator performs well in markets that are clearly trending, whether it's an upward trend or a downward trend. You can easily spot buy and sell signals by looking at when the indicator changes in relation to the closing price.

When the Supertrend indicator closes below the price and changes to green, it generates a buy signal. Conversely, when the Super Trend closes above the price and turns red, it produces a sell signal.

Trading with Supertrend Indicator - Buy Sell

 

Combine Supertrend with Other Indicators (Multi-Timeframe Analysis)

This strategy combines the Supertrend indicator with other indicators in a multi-timeframe analysis.

Start by using the Supertrend indicator on a higher timeframe to determine if the market is in an upward (bullish) or downward (bearish) trend. When the price is above the Supertrend line, it's a positive sign indicating an upward trend.

During an uptrend, it's a good time to think about buying, while in a downtrend, it's a signal to consider selling.

Then, shift your attention to the MACD and Stochastic indicators on a lower timeframe to confirm a buying opportunity. To confirm this, look for signals such as the MACD crossing above its signal line or the Stochastic displaying a bullish sign. This confirmation indicates that it's a favorable moment to enter the market.

Trading with Supertrend Indicator - Multi Time Frame

 

Trading Scenarios with Supertrend Indicator

To help you understand better, I'll give you two examples of how to use the Supertrend indicator in trading.

 

#1 EUR/USD - Buy

In the H4 chart for EUR/USD below, we can see that the price is currently following a downward trend. It's worth noting that the price is positioned below the Supertrend indicator line. To initiate a buy position, we patiently wait until the red color changes to green, indicating a shift toward a bullish trend.

Supertrend Indicator - Buy 1

 

As the price continued to rise and broke through the support line, the buy position was activated. It was entered at around 1.05063, and a stop loss was set at 1.03929 (113.4 pips).

Supertrend Indicator - Buy 2

Following the initiation of the buy position, the price continued its upward trajectory. To align with the ascending Supertrend line, the stop loss was adjusted accordingly.

Ultimately, the buy position was closed due to reaching the stop loss level at approximately 1.06894. This particular buy position resulted in a profit of approximately 183.1 pips.

Supertrend Indicator - Buy 3

 

#2 GBP/USD - Sell

In the H4 chart of GBP/USD below, we can see a noticeable shift in the price trend. It went from an uptrend to a downtrend, which is indicated by the Supertrend line changing color from green to red.

Supertrend Indicator - Sell 1

With this clear downward trend, the logical move is to take a sell position. Now, let's switch to a smaller H1 timeframe to find potential entry points using the stochastic indicator.

On the H1 timeframe, the sell signal occurs when there is a crossover of Stochastic lines above the 80 level. This happened as the price crossed the 80 level, prompting us to enter the sell position at 1.29522.

Supertrend Indicator - Sell 2

We placed a stop loss above the Supertrend line at 1.29772 (25.0 pips). We consistently adjusted this stop loss downward as the Supertrend line declined. After entering the sell position, the price continued to drop and formed a new lower low.

Unfortunately, we had to close the sell position at 1.28640 because it hit the stop loss. However, this sell position had resulted in a gain of 88.2 pips.

Supertrend Indicator - Sell 3

 

Pros and Cons of Supertrend Indicator

✔️Pros ❌Cons
  • Easy Trend Identification: The Supertrend indicator is excellent at signifying the current trend and the moment it changes.
  • Clear Signals for Buying and Selling: When the price crosses the Supertrend line, it sends a signal, which is like a green light for traders to start or stop a trade.
  • Quick Decision-Making: The Supertrend uses visual signals that help traders make decisions faster. They can see the trend easily and make choices quickly, which is super useful in fast-moving markets.
  • Adaptable: The Supertrend indicator is flexible. It can work with different timeframes and types of assets, so it can fit lots of different trading styles and preferences.
  • Automatic Protection: Another cool thing about the SuperTrend is that it can act like a guard for your trades. It can automatically adjust the stop-loss levels to lock in profits as a trade goes well. This is like having a safety net for your trades.
  • Challenges in Sideways Markets: The Supertrend does really well when the market is going in a clear direction, like up or down. But when the market is just moving sideways or not going anywhere specific, the Supertrend can have a tough time. It might give signals that aren't quite right, which can lead to losses for traders.
  • Sensitivity to Settings: How well the Supertrend works can depend a lot on the specific settings you choose, like the period and multiplier. Figuring out the perfect settings can be a bit tricky and might take some time.
  • Not a Complete Solution: It's super important to know that the Supertrend isn't a one-stop-shop for trading. Relying only on this indicator can be risky. Traders often still need to use it alongside other tools and techniques to make sure they get things right.

 

Backtesting The Supertrend Indicator

To demonstrate how effective the Supertrend indicator is, we conducted a backtest. This testing phase lasted for a duration of six months. We split this period into two sets of three months each, one from February to April 2023, and the other from June to August 2023.

For our evaluation, we use the EUR/USD currency pair on an H1 timeframe. To decide when to enter trades, we relied on the Supertrend to identify buy and sell signals.

Meanwhile, for exit positions, we used a risk-reward ratio of 1:2. We allowed the price to either trigger the stop-loss or take-profit levels. Here are the outcomes of our backtesting.

Details

Value

Total Trade

80

Profit

35

Loss

45

Winrate

44%

Average Profit

2R

Average Loss

1R

Maximum consecutive losses

5

Maximum consecutive profits

4

Average Trade per month

13

Average profit per month

4.1%

Expectancy Value

0.3125

Total Profit in 6 months

25R

From the results of the testing above, there are four important points to discuss:

 

Win Rate Below 50%

Out of a total of 80 trades, we had 45 losses and 35 profits, giving us a win rate of around 44%. In simpler terms, we had more trades that didn't go our way. So, relying solely on the Supertrend indicator to decide when to buy and sell may not always lead to success. If the idea of having more losses than wins makes you uncomfortable, this approach might not be the right fit for you.

 

5 Maximum Consecutive Losses

During our testing, we experienced a maximum of 5 consecutive losses in a row. That's one more than our longest winning streak, which was 4 trades. This means that not only did we have more losing trades overall, but we also had periods where we faced longer sequences of losses compared to winning streaks.

If we were to expand our trading to a larger set, say 1000 trades, we could encounter as many as 7 consecutive losses. This tendency for extended losing streaks is often linked to market conditions when the market is moving sideways or lacks a clear trend.

 

Positive Expectancy Value

Despite our win rate being less than 50% and going through those longer losing streaks, our overall strategy still came out profitable. This is because we had a smart risk-reward ratio of 1:2. To put it simply, one successful trade could make up for the losses from two previous trades.

Over 6 months, following this approach resulted in a total profit that was 25 times what we initially risked, often expressed as 25R. It demonstrates that managing our risks wisely can be a successful strategy, even when we don't win more often than we lose.

 

Average Trade Per Month Is 13 Trades

With an average of 13 trades per month, it's essential to understand that this means we won't be entering trades every day, especially when using the H1 (1-hour) time frame. In fact, on average, we'll be making about 3 to 4 trades per week.

If the idea of not entering trades every day makes you uncomfortable, you could opt for a shorter time frame like 15 minutes, which would provide more trading opportunities. But, it might come at the cost of reduced accuracy.

If you're seeking a middle ground, you could consider using a multi-timeframe analysis approach, as mentioned earlier. This would allow for more frequent trade entries while still benefiting from the insights provided by higher time frames.

 

FAQ on Supertrend Indicator

  • How Effective is Supertrend Indicator?
    The Supertrend indicator can be used for daily, hourly, or weekly charts, making it useful for any trader. It works well in trending markets but tends to give false signals in volatile markets. Therefore, traders use this indicator along with other indicators like MACD, Stochastic, RSI, Parabolic SAR, etc.

  • How to Avoid False Signals in Supertrend Indicator?
    To avoid false signals, it's really important to focus on situations where the market is clearly trending. When the market is in a strong trend, you don't get many false signals, which means your trading decisions are more likely to be right. But things change when the trend starts to weaken, especially during uncertain times. That's when you start seeing more false signals, and your accuracy goes down. That's why it's a good idea to always check how strong the current trend is before using the Supertrend indicator.

  • What is the Best Setting for Supertrend Indicator?
    If you are new to using Supertrend, it's best to leave the default settings of ATR at 10 and the multiplier at 3. Many traders consider these as the best settings as they perform admirably on different timeframes, such as intraday and multiday trading.

  • What is the Best Timeframe for Supertrend?
    There is no universally "best" timeframe for the Supertrend indicator. It depends on your trading or investing style and your comfort level with the timeframe's associated risks and opportunities. However, the lowest timeframe you should use is the 15-minute chart.

 

Conclusion

The Supertrend indicator is a helpful guide for traders in the complicated world of trading. It shows them which way the market is going and when it's a good time to buy or sell. What's cool about it is that it considers how wild the market is, which makes it better at predicting trends.

But, there are some things to remember. This tool isn't great when the market isn't sure where it's going. Also, figuring out the best way to use it can be a bit tricky.

So, here's the big takeaway: The Supertrend is awesome, but it's not the only thing you need for successful trading. Traders usually use it along with other tools and tricks to make sure they make the right moves. Before putting the Supertrend into action, it's advisable to conduct backtesting to evaluate its performance in a demo account.