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The trend is your friend. We’ve all heard it, right? But if you have even a brief trading experience, you’ll know that identifying a trend is not that simple. In fact, the market is moving sideways most of the time, and when it’s trending, we often recognize it too late. So, in this post, we’re going to talk about the Supertrend indicator, which can make everything much easier.
The Supertrend Indicator is based on the average true range (ATR) and not only helps you identify the market trend but also produces clear buy and sell signals. So you can also use the Supertrend indicator in automated strategies using binary options trading bots. It’s even a contender to be one of the best indicators for binary options.
- The Supertrend Indicator is a trend-following tool based on the Average True Range (ATR) that also generates buy and sell signals.
- It works best in trending markets but may produce false signals in range-bound conditions.
- Using the right multiplier settings and combining it with other indicators can improve its accuracy.
- Traders should always backtest and practice on a demo account before using it in live trading.
What Is the Supertrend Indicator?
The Supertrend indicator is a trend-following technical tool that can help us traders identify market direction and even potential entry or exit points. It is calculated using the average true range (ATR) and a multiplier. This Supertrend multiplier determines its sensitivity to price movements. To calculate the Supertrend formula, we first need the ATR:
Where:
- n = Number of periods or candles
- TR = True range
To calculate the TR (true range), you can use each of these methods:
- The difference between today’s high and low
- The absolute difference between today’s high and yesterday’s close
- The absolute difference between today’s low and yesterday’s close
The ATR is also a popular pre-built indicator in many trading platforms.
Now, the Supertrend formula consists of two parts, with each of them calculating one band:
The high (low) is the highest (lowest) price of the asset in your chosen time period. We’ve already gone through the ATR, and then we get to the multiplier.
The Supertrend multiplier uses a basic mathematical concept, as it is a constant value that is, of course, determined by the user. The multiplier specifies the sensitivity of the Supertrend indicator to price movements:
- Higher multiplier = Wider bands -> (Less sensitive)
- Lower multiplier = Narrower bands (More sensitive)
How to Use the Supertrend Indicator?
The Supertrend appears as a single dynamic line on a price chart. It can shift above or below the price to signal bullish or bearish trends. Here’s how to read the Supertrend indicator to identify the trend:
- When the price is above the Supertrend line, the trend is considered bullish.
- On the contrary, when the price is below the Supertrend line, the trend is bearish.
On most trading platforms, the Supertrend indicator’s line changes color according to the trend. But that’s not all, as the Supertrend also produces buy and sell signals. So, you can use it for forex, crypto, stocks, and even binary options trading.
Here’s how the Supertrend looks on TradingView:
You can easily apply the Supertrend indicator to your TradingView chart by searching for it in the “Indicators” tab.
Moreover, as most of our audience are binary options traders, you can also apply the Supertrend indicator on Pocket Option and use it for binary trading:
Recommended Supertrend Strategy
As already mentioned, the supertrend indicator is a very easy-to-use tool to build either a manual or an automated trading strategy. Here’s my personal suggestion for a Supertrend strategy, which you can use for both CFDs and binary options:
- Start from the higher timeframes and identify the overall trend using the Supertrend.
- Go to the lower timeframe (your trading timeframe) and wait for a buy/sell signal, which is in line with the higher timeframe trend. You can execute the trade if it’s in the same direction.
- For a stop-loss, you can use either a static one at the nearest high or low or a dynamic one by exiting the trade when the Supertrend shows an opposite shift.
- The same goes for take profits, as you can set a static one at a liquidity pool or even target a fixed risk-reward ratio. For a dynamic TP, you can once again use a Supertrend shift.
- If you’re a binary options trader, you won’t have Sl and TP orders. Yet, I recommend you to set your expiry at 3-5 times your entry timeframe.
- So, if you’re trading on the 1-minute chart, set your expiry 3-5 minutes later.
- If you’re trading a 5-minute chart, set it 15-25 minutes later, and so on.
Is the Supertrend Indicator Profitable?
Well, the answer to this question is both yes and no, and it solely depends on you as the trader. Any strategy, whether it’s a classical price action pattern like the flag pattern or a newer method like the ICT fair value gap, can be unprofitable if you don’t have a clear plan and manage your risk. The same goes for the Supertrend indicator.
The Pros and Cons of the SuperTrend Indicator
Just like any trading indicator or strategy, the supertrend has its strengths and limitations. Let’s have a quick look:
| Pros | Cons |
|---|---|
| ✅ Easy to use and read for everyone | ❌ It’s still based on the past price action and is a lagging indicator |
| ✅ Customizable settings depending on your strategy | ❌ Not as effective in sideways or rangebound markets |
| ✅ Can help you identify trends quickly | ❌ Finding the best settings can be tricky |
| ✅ Provides buy and sell signals which can be automated | ❌ Can’t rely solely on it without sufficient experience |
Pro Tips for Using the Supertrend
I personally don’t use the Supertrend indicator as my main strategy. However, I still know a thing or two about using trend indicators due to my 6+ years of trading experience. So, here’s what I think everyone should consider:
- Practice before Going Live: Switching to a new trading strategy requires you to gather data by backtesting and trading demo accounts before risking real funds.
- Personalize: By personalizing, I mean modifying the settings of the indicator, like the period and the multiplier, to match your goals and preferences.
- Use Complements: If you’re an experienced trader, use the Supertrend alongside your tape reading skills. If not, you can use it with other indicators, especially oscillators like the RSI or the CMO.
- Start from the Higher Timeframe: Multi-timeframe is one of the keys to profitability. When using the supertrend, first identify the overall trend on the higher timeframes and then execute accordingly on the lower ones.
- Trade the Volatility: You should not be in the market at all times. In fact, profitable traders only execute during highly volatile hours and sessions. Check out the best times to trade binary options.
Conclusion
The Supertrend indicator is one of the best tools when it comes to trend identification. It’s based on the Average True Range (ATR), and it also produces buy and sell signals based on trend shifts, which can be pretty useful for automated trading and even binary options.
Yet, it won’t matter if you have the best indicator if you don’t know how to use it properly. So, make sure to use demo accounts and backtesting tools to build your Supertrend strategy before jumping into live trading. Finally, don’t forget about risk management to mitigate the risk of ruin.
FAQ
How to use the Supertrend indicator in TradingView?
In TradingView, search for “Supertrend” in the Indicators section and select a built-in or community-created version. Adjust the ATR period and multiplier based on your trading strategy.
How is Supertrend calculated?
The Supertrend Indicator is based on the Average True Range (ATR) and a multiplier. It is calculated as:
- Upper Band = (High + Low) / 2 + (ATR × Multiplier)
- Lower Band = (High + Low) / 2 – (ATR × Multiplier)
How does the Supertrend indicator work?
The indicator plots a trend-following line that shifts above or below the price based on market direction. When the price is above the line, it signals a bullish trend; when below, it signals a bearish trend.
How can I avoid false signals with the Supertrend indicator?
Use higher time frames, set optimized ATR multipliers, and combine with support/resistance or momentum indicators like RSI to validate signals.
What is the best technical indicator to use with the Supertrend indicator?
Commonly used indicators include RSI (for momentum), moving averages (for trend confirmation), and MACD (for crossover signals) to enhance accuracy.
Why is the Supertrend indicator important?
It helps traders identify trends, manage risk with stop-loss levels, and adapt to volatility while being simple and effective across different asset classes.
