- Type of Indicator: Trend-following
- Creator: Olivier Seban
- When Created: 2008
- First Mentioned In: “Tout sur le trading” (All About Trading)
What Is The Supertrend?
The Supertrend is a trend-following indicator that is designed to identify the direction of a trend and generate potential buy and sell signals. It is based on the average true range (ATR) and the price.
The tool consists of a line that follows the price, with buy and sell signals generated when the price crosses above or below the line.
How Do You Read The Supertrend?
The Supertrend provides traders with information about the direction of a trend and potential buy and sell signals. It is designed to help traders identify and participate in trends while avoiding choppy or range-bound markets.
How Does The Technical Indicator Work?
The Supertrend works by calculating the average true range (ATR) of the market and then multiplying it by a factor to determine the distance of the indicator line from the price.
The factor used to calculate the tool can be adjusted based on the trader’s preference and the market being analyzed.
How Is The Tool Calculated?
The calculation for the Supertrend involves the following steps:
Calculate the average true range (ATR) of the market over a specified period of time.
Multiply the ATR by a factor (e.g. 2) to determine the distance of the Supertrend line from the price.
Calculate the Upper and Lower Supertrend lines by adding/subtracting the ATR multiplied by the factor to/from the closing price of the previous period.
The Supertrend line is the Upper/Lower line depending on whether the trend is bullish or bearish.
How Do You Use The Supertrend?
Trend Direction: Traders can use the Supertrend to identify the direction of the trend. When the indicator line is above the price, it may indicate a potential uptrend, while when it is below the price, it may indicate a potential downtrend.
Buy and Sell Signals: Traders can also use the tool to generate potential buy and sell signals. When the price crosses above the indicator line, it may indicate a potential buy signal, while when it crosses below the Supertrend line, it may indicate a potential sell signal.
Stop Loss: Traders can also use the Supertrend to set a trailing stop-loss level. When the price closes below the indicator line in a long position or above the indicator line in a short position, it may indicate a potential exit signal.
Additional Trading Tips
Use the Supertrend in conjunction with other technical analysis tools or chart patterns to confirm potential trading signals and create a more comprehensive trading strategy.
Adjust the time periods and factor used to calculate the Supertrend to suit your specific trading style and the market you are analyzing.
Be aware that the tool is a trend-following indicator and may not work well in a choppy or ranging market. Traders should also consider other technical analysis tools or chart patterns to confirm potential trading signals.
Use proper risk management techniques to protect your investments, and always consider other factors in addition to the technical indicator when making trading decisions.
Backtest and practice using the technical tool on historical data to understand its strengths and weaknesses and to develop a solid trading strategy.
Read and learn from books written by the tool’s creator, Olivier Seban.