SuperTrend

Definition

The SuperTrend is a trend-following indicator based on the Average True Range (ATR). It uses a single line to combine trend detection and volatility. This indicator can detect trend direction changes and provide precise buy or sell signals in trending markets.

Components and Calculation

  1. Average True Range (ATR)

The ATR measures the price volatility over a certain period, providing an average value as the result. It is calculated based on the maximum value among the following three:

ATR=Max (∣high−low∣,∣high−previous close∣,∣low−previous close∣)

Where:

  • |high - low| = Distance between the highest and lowest prices of the day

  • |high - previous close| = Distance between the highest price of the day and the previous day's closing price

  • ∣low−previous close∣ = Distance between the lowest price of the day and the previous day's closing price

  1. SuperTrend

The SuperTrend is defined through ATR breakouts, including the middle, upper, and lower bands.

  • Middle Band: hl2=(high+low)/2

  • Upper Band: hl2+Multiplier×ATR

  • Lower Band: hl2−Multiplier×ATR

The Multiplier is a coefficient multiplied by the ATR to determine the width of the SuperTrend bands.

How to Use the SuperTrend

  1. Trend Identification

The SuperTrend indicator indicates the current market trend through its position. When the price is above the upper band, the market is in an uptrend; when the price is below the lower band, the market is in a downtrend.

  1. Entry and Exit

  • Open long when the price breaks above and closes above the upper band.

  • Open short when the price breaks below and closes below the lower band.

  1. Stop Loss Setting

The SuperTrend can also serve as a trailing stop, helping traders exit the market promptly during trend reversals.

Advantages and Disadvantages of the SuperTrend

Advantages

  • Simple and Easy to Use: The SuperTrend indicator is intuitive and easy to understand, suitable for both novice and experienced traders.

  • Effective in Capturing Trends: It effectively filters market noise, helping traders capture major trends for substantial profits.

  • Dynamic Stop Loss: When used as a trailing stop, the SuperTrend dynamically adjusts the stop loss ratio, aiding in profit protection.

Disadvantages

  • Lag: Due to its reliance on the ATR and moving averages, the SuperTrend may lag in fast-changing markets, resulting in delayed signals.

  • False Signals: The SuperTrend's performance depends on market volatility. In low volatility, choppy markets, it may produce many false signals, leading to frequent trading operations.

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