Supertrend is a trend-following indicator based on Average True Range (ATR). The calculation of its single line combines trend detection and volatility. It can be used to detect changes in trend direction and to position stops.
The Supertrend indicator was created by Olivier Seban.
To calculate bands of the Supertrend, use the following formulas:
hl2 = (high + low) / 2
basicUpperBand = hl2 + (multiplier × ATR)
basicLowerBand = hl2 - (multiplier × ATR)
upperBand = basicUpperBand < prev upperBand or
prev close > prev upperBand ? basicUpperBand : prev upperBand
lowerBand = basicLowerBand > prev lowerBand or
prev close < prev lowerBand ? basicLowerBand : prev lowerBand
superTrend = trendDirection == isUpTrend ? lowerBand : upperBand
The trendDirection is determined based on the fulfillment of the following conditions:
Until the ATR value is calculated trendDirection = isDownTrend
else if prev superTrend == prev upperBand
trendDirection := close > upperBand ? isUpTrend : isDownTrend
trendDirection := close < lowerBand ? isDownTrend : isUpTrend
The Supertrend is a trend-following indicator. It is overlaid on the main chart and their plots indicate the current trend. A Supertrend can be used with varying periods (daily, weekly, intraday etc.) and on varying instruments (stocks, futures or forex).
The Supertrend has several inputs that you can adjust to match your trading strategy. Adjusting these settings allows you to make the indicator more or less sensitive to price changes.
For the Supertrend inputs, you can adjust atrLength and multiplier:
- the atrLength setting is the lookback length for the ATR calculation;
- multiplier is what the ATR is multiplied by to offset the bands from price.
What to look for
When the price falls below the indicator curve, it turns red and indicates a downtrend. Conversely, when the price rises above the curve, the indicator turns green and indicates an uptrend. After each close above or below Supertrend, a new trend appears.
The Supertrend helps you make the right trading decisions. However, there are times when it generates false signals. Therefore, it is best to use the right combination of several indicators. Like any other indicator, Supertrend works best when used with other indicators such as MACD, Parabolic SAR, or RSI.