Supertrend Indicator: Calculation, Settings and Signals in Trading

What Is the Supertrend?

The Supertrend is a trend-following indicator that appears on the chart as a single line. In an uptrend it runs below the price and is usually shown in green, in a downtrend above the price and in red. If the price closes on the other side of the line, it flips sides: the indicator then shows a new trend direction.

The distance between the line and the price is set by market volatility, measured with the Average True Range (ATR). In quiet phases the line sits close to the price, in turbulent ones further away. That is why the Supertrend serves not only as a direction indicator but also as a trailing stop that follows the trend. It was developed by the French trader Olivier Seban; today it is included in almost every charting package.

How Do You Calculate the Supertrend?

The Supertrend is derived from the median price of each candle and a multiple of the ATR. Two settings define it: the ATR period and the factor by which it is multiplied. Common values are 10 candles and a factor of 3.

1. Calculate the ATR: the true range of a candle is the largest of the three ranges high minus low, high minus previous close and previous close minus low. The ATR is its smoothed average over the chosen period, following J. Welles Wilder.
2. Form the bands: from the median price (high plus low, divided by two), the upper band lies factor times ATR above it, the lower band factor times ATR below it.
3. Trail the bands: the lower band may only rise as long as the price closes above it; the upper band may only fall as long as the price closes below it. This creates a staircase that follows the trend.
4. Determine the direction: in an uptrend the lower band is the Supertrend line. If the price closes below it, the direction flips, and the upper band becomes the line. The same applies in reverse.

The line therefore depends only on the close and on volatility. A wick through the line changes nothing; only a close on the other side triggers the flip.

What Does the Supertrend Show About the Market?

The Supertrend shows three things at a glance: the direction of the trend, a point at which this direction counts as refuted, and how far away that point has to be because of volatility. It thereby answers the question of whether a trend is still intact, without you having to draw lines yourself.

It is a lagging indicator: it flips only after the price has already moved clearly. It therefore always misses the start of a reversal, and in sideways phases it flips back and forth several times, because no direction holds long enough. Its strength lies in trends, where it keeps the trader in the position for a long time and trails the stop with the price.

Which Settings Are Common?

Period and factor determine how close the line sits to the price. A small factor or a short period makes the Supertrend sensitive: it flips earlier, but also more often wrongly. A large factor or a long period makes it sluggish: it holds trends longer, but gives back more of the profit when it flips.

There are no fixed rules for the "best" setting. It depends on the volatility of the market and on the timeframe. Anyone who changes the setting should check how often the line would have flipped in recent months and how many of these flips were reversed after a few candles.

Which Signals Does the Supertrend Give?

The Supertrend gives three kinds of hints: the change of direction, the confirmation of a running trend and the stop that follows the price. At FinScans the first two appear as triggers.

Change of Direction (Flip)

The flip is the best-known signal: the price closes above the red line, the line jumps below the price and turns green. That argues for a beginning uptrend. Conversely, a close below the green line argues for a beginning downtrend. Because the flip comes only after a clear move, part of the new direction has already run.

Continuation in a Running Trend

After a flip, the Supertrend shows candle by candle whether the trend remains intact. A pullback that does not reach the line, followed by a line that rises again, confirms the uptrend. Many traders use such pullbacks for an entry in the direction of the trend, with the stop beyond the line.

The Line as a Trailing Stop

Because the line only rises in an uptrend, it is suitable as a trailing stop. Anyone holding a position in the trend trails the stop with the line and exits when the price closes on the other side. This way the position runs as long as the trend holds, and the exit follows a fixed rule.

When Does a Supertrend Flip Confirm, and When Does It Not?

A flip is confirmed when the price keeps running in the new direction over the following candles and the line follows. It fails when the price falls back to the old side after a few candles and the line flips back. This happens above all in sideways phases and during short countermoves in a strong trend.

On the chart the price falls over many candles, with the red line following it from above. After a short rise, the flip candle closes at 107.50 above the red line at 106.78: open 106.70, high 107.60, low 106.52. The line jumps below the price to 103.51 and rises to 103.81 in the next candle. But the price then falls back with closes of 106.90, 106.20 and 105.00. Four candles after the flip it closes at 103.80 below the green line, and the Supertrend flips back down, with the red line now at 108.13. The decline continues to the close of 97.50 at the right edge.

How do you spot the failure early? The rise before the flip consisted of a few candles after a long decline, and already the candle after the flip closed lower. The next candles gave back the entire rise. A flip against a long trend without confirmation from higher timeframes is prone to exactly this course.

Example of Entry, Stop, and Target

The following example shows an upward flip of the Supertrend at the end of a downtrend. It is a teaching example, not a recommendation for a particular market.

The price falls from the swing high at 110.81 over more than twenty candles, with the red line following it from above down to 102.74. After a bottom, the flip candle closes at 103.90 above this line: open 102.50, high 104.20, low 102.36. The line flips below the price and stands at 99.82 on the flip candle.

The entry is the close of the flip candle at 103.90. The stop lies 0.10 below the green line at 99.72, so the risk is 4.18 points. The target is the swing high at 110.81 where the decline began; the distance is 6.91 points, and the reward-to-risk ratio is about 1.7 to 1. The price reaches the target 21 candles after the entry. Anyone trailing the stop with the line has raised it to 107.41 by then, securing a large part of the profit.

How Do You Use the Supertrend Across Multiple Timeframes?

On short timeframes the Supertrend flips often, because even small countermoves carry the price across the line. On the higher timeframes flips are rarer and last longer. Many traders therefore use the direction of the higher timeframe as a filter and trade only flips in that direction on the short one.

If the Supertrend points up on the 4h and 1d charts, an upward flip on the 1h chart after a pullback is an entry in the direction of the trend. A downward flip on the 1h chart is then more an opportunity to secure profits than a reason for a counter-position. On the signal page and in the cockpit you can see the trend direction on all eight timeframes and thus check whether a flip runs with or against the bigger picture.

How Do News and Scheduled Events Affect the Supertrend?

An important release can make the Supertrend flip in a single candle without the trend really having turned. If the price jumps over the line after a figure and then falls back, a flip with an immediate flip-back results. At the same time, a large candle raises the ATR, and the line then lies further from the price.

So check in the economic calendar whether a flip formed at the time of a release. The news situation in the cockpit also shows whether the reports support the new direction. A flip after news that fits the news situation carries more weight than one that arose only from a price jump.

How Do You Use the Supertrend in the Four Trading Styles?

In all styles the Supertrend is above all a tool for direction and exit. How tightly you set it and how you combine it with higher timeframes distinguishes the styles.

The Supertrend in Scalping

In scalping on the 15m and 30m charts, the Supertrend flips often, especially in quiet phases such as the Asian session. Many flips are then noise. It makes more sense to trade only flips in the direction of the 1h or 4h trend and to ignore the rest.

The stop sits beyond the line, which runs close to the price on short timeframes; spread and fees therefore make up a noticeable part of the risk. Targets lie at the next zone or at a fixed multiple of the risk, and positions are held for minutes to a few hours. The London and New York opens bring most of the flips that hold. Many scalpers therefore use the Supertrend as an exit rule rather than as an entry.

Around high-impact releases many scalpers pause, because a price jump skips over the line. Cryptocurrencies have no session boundaries, but thin weekend trading that favours flips. The time commitment is high; the style suits traders who decide quickly and can tolerate many small losses.

The Supertrend in Day Trading

In day trading on the 1h and 2h charts, the Supertrend is a good frame for the trading day. If it points up in the morning and the 4h chart confirms the direction, the day trader looks for entries after pullbacks that do not reach the line. A downward flip ends this view.

The stop sits beyond the line and is trailed with it. The target is the next zone or the daily high or low. Positions are closed before the end of the session, so overnight gaps play no role. A flip shortly before the end of the session is rarely worth an entry, because little time remains until the close; the day trader then uses it only for the exit.

On the 1h chart the Supertrend flips less often than in scalping, but a flip also costs more, because the line is further away. Releases in the calendar are the most common reason for flips that do not hold. The style suits traders who can follow the market attentively for a few hours a day.

The Supertrend in Swing Trading

In swing trading on the 4h and 8h charts, the Supertrend plays to its strength: it keeps positions in the trend for days and trails the stop. An upward flip after a longer decline, confirmed by the 1d chart, is a classic entry.

The stop sits beyond the line, and the target at a zone of the 1d chart or open as long as the line does not flip. Positions are held for days to a few weeks; overnight financing and weekend gaps are part of it. A gap on Monday can carry the price beyond the line, and the exit is then worse than planned. Anyone entering after a flip can also build the position in parts, for example after the first pullback to the line.

The comparison with the 1d chart is important: a flip on the 4h chart against the daily trend is often just a countermove. If a central bank meeting falls within the holding period, a smaller position can make sense. The style suits traders with little time during the day who want to follow a fixed exit rule.

The Supertrend in Position Trading

In position trading on the 12h and 1d charts, the Supertrend shows the large trends. Flips are rare, and a line that rises for weeks describes a stable uptrend. Many position traders use a more sluggish setting so that the line does not flip with every larger countermove.

The stop lies far below the price, and the position is correspondingly small. The exit follows the flip of the line, and positions are held for weeks to months. At this level targets are often not set at all; instead the position runs until the line flips.

At this level the news situation counts for more than in short-term trading. A flip that coincides with a turn in monetary policy carries more weight than one without a fundamental background. The time commitment is low; the style suits traders who can tolerate large pullbacks.

Supertrend or Parabolic SAR?

Both indicators follow the trend, lie below the price in an uptrend and above it in a downtrend, and flip sides when the trend turns. The difference lies in how they follow the price. The Supertrend sets its distance by volatility, while the Parabolic SAR approaches the price faster with every new candle.

Compared with the moving average, the Supertrend reacts to volatility rather than only to the price. A moving average lies in the middle of the price even in a sideways market, while the Supertrend jumps back and forth there.

What Mistakes Are Common with the Supertrend?

• Trading every flip: in sideways phases the line flips often, and many flips are reversed after a few candles.
• Trading against the higher timeframe: a flip on the 15m chart against the trend on the 4h chart is usually a countermove.
• Changing the setting after every loss: a setting that fits perfectly in hindsight rarely fits the future.
• Not trailing the stop: anyone using the line as an exit has to trail the stop with it, otherwise the advantage is lost.
• Overlooking releases: a price jump after a figure triggers flips that do not hold.
• Forgetting the position size: if the line is far away, the risk is large, and the position must be smaller, see risk management.

How Supertrend Triggers Are Named in FinScans Signals

On the signal page, these triggers appear in the trigger table, each with an arrow: ▲ means FinScans counts the trigger on the bullish side, ▼ on the bearish side. Four names belong to this page:

• “SUPERTREND Flip Bullish” (▲) and “SUPERTREND Flip Bearish” (▼): The Supertrend flips to the side below or above the price.
• “SUPERTREND LEG Leg2 Up” (▲) and “SUPERTREND LEG Leg2 Down” (▼): A hint within a running trend. These triggers do not appear on the flip candle but a few candles later, when the Supertrend already points in the direction of the arrow.

The signal page shows the weight of each trigger. For "SUPERTREND LEG Leg2 Up" and "Leg2 Down" it is 0.00: they appear in the table as a hint but do not count towards the overall direction of the signal. A signal contains at most one of the four names.

The signal page shows no class for indicators. These triggers almost always appear in signals of their own direction. Such a trigger never stands alone: FinScans combines it with the other triggers of the same signal into an overall direction. Whether the signal runs with or against the larger move is shown by the trend across the eight timeframes and the overall assessment.

The following block shows current data on these triggers. The hit rate should always be read relative to the average: if it is above, the trigger has a statistical edge; if it is below, it is better used as a hint than as the sole reason to enter. The rates can vary considerably by trading style, because there is more noise on short timeframes. The distances to target and stop also play a role: a tight stop is hit more often than a wide one, a distant target less often than a near one.

What the Machine Reports, What You Check Yourself

On the signal page, these triggers appear for forex and crypto pairs; their name describes the event at the Supertrend, not the position in the larger picture. Whether a flip offers a viable setup is something you decide yourself in hybrid trading.

• The machine reports, for example, "SUPERTREND Flip Bullish"; you check on the chart whether the flip comes out of a sideways phase or after a clear trend.
• The signal page shows the arrow and weight of the trigger; you note that "Leg2" with a weight of 0.00 stands there only as a hint.
• The machine provides the trend across eight timeframes; you check whether the flip runs in the direction of the higher timeframes.
• The data block shows the hit rate so far; you check in the economic calendar whether the flip arose from a price jump after a release.
• The signal page shows target and stop; you measure the distance to beyond the Supertrend line and check whether the reward-to-risk ratio fits your risk management.
• You decide whether to trail the stop with the line or to set a fixed target.

Frequently asked questions

Which Setting Is Best for the Supertrend?

There is no best setting. Common values are an ATR period of 10 and a factor of 3. Smaller values make the line more sensitive and produce more flips, larger ones hold trends longer but give back more when they flip. Anyone changing the setting should check how many flips in the past were quickly reversed.

How Does the Supertrend Work as a Stop?

In an uptrend the line rises with the price and never falls. Anyone holding a position trails the stop with the line and exits when the price closes below it. This keeps the position in the trend, and part of the profit is secured. In a downtrend the same applies in mirror image with the line above the price.

Why Does the Supertrend Flip So Often?

Because it is a trend-following indicator and finds no direction in sideways phases. If the price runs in a narrow range, small moves are enough to carry it across the line, and the Supertrend flips back and forth. A filter using the direction of a higher timeframe or a more sluggish setting reduces these flips.

What Is the Difference Between the Supertrend and the Parabolic SAR?

Both follow the trend and flip sides when it turns. The Supertrend sets its distance by volatility and stays put in calm trends, while the Parabolic SAR moves closer to the price faster with every new high or low. The Supertrend therefore usually holds trends longer, and the Parabolic SAR secures profits earlier.

Sources

• Wilder, J. Welles: New Concepts in Technical Trading Systems, Trend Research, 1978.
• Kaufman, Perry J.: Trading Systems and Methods, John Wiley & Sons, 2013.