How to Use Supertrend
To use Supertrend, treat the line's side as a directional filter rather than as an entry signal. It is built from the average true range, so its distance from price scales with volatility, and it flips repeatedly in a range because that is what the calculation does.
Video: Michael Whitman on YouTube, a Supertrend strategy walkthrough. Watch it on YouTube.
Supertrend draws a line above or below price and flips sides when price crosses it. The line’s distance is a multiple of the average true range, which means everything the indicator does is a consequence of how volatile the instrument currently is.
Before you start
A decision about whether you are using it as a filter or as an entry signal. As a filter it is useful. As a signal it produces a trade every time price brushes the line.
The instrument’s average true range, because that is the only input that matters. Look at the fourteen-period reading on the chart you will trade and how much it has moved over the past few months, since the line’s distance from price is that number times the multiplier.
An honest expectation of how often it flips in a range. In a quiet market the line sits close to price and the flips are frequent. That is the calculation, not a fault.
The steps
1. Read the line’s side as the trend
Line below price means the indicator considers the trend up; above means down. That is the entire output, and it is a filter rather than an instruction.
2. Set the multiplier before the period
The multiplier decides how many average true ranges away the line sits, which decides how much movement is tolerated before a flip. It is the dominant input by a considerable margin.
3. Expect frequent flips in a range
Low volatility means a small average true range, which means the line sits close, which means it flips often. Widening the multiplier reduces this and makes the indicator slower everywhere else.
4. Use it to permit trades, not to generate them
Long setups only while the line is below price. The setup itself comes from structure, and the indicator decides which half of your setups you are allowed to take.
5. Do not use the line as a stop
It is tempting because it looks like a trailing stop and it moves with every bar. Where a trade is invalidated is a structural question with a fixed answer, not one that updates continuously.
6. Check the flip against the bar close
An intrabar crossing can undo itself. Reading the flip on the close is slower and it is the only version that does not change its mind after you have acted on it.
7. Accept that it always enters late
The flip requires price to have already moved a multiple of the average true range. That lateness is what makes it a filter worth having, and it is not something to be tuned away.
How to tell it worked
Its role was written down as filter or trigger, before the first trade.
0 stops were placed on the indicator line, all of them coming from structure instead.
Every flip acted on was confirmed on a bar close, so 0 trades came from an intrabar crossing.
And the multiplier was chosen deliberately, with a stated reason rather than left at a default.
What it is underneath
A volatility band with a memory. It tracks the highest or lowest it has been since the last flip, offset by a multiple of the average true range. There is no trend detection in it at all.
Which is why it behaves so differently across instruments. The same settings on a quiet instrument and a volatile one produce completely different flip frequencies, because the input has changed rather than the market’s character.
Tuning the multiplier honestly
A larger multiplier means fewer flips and later ones. The line sits further out, tolerates more movement, and confirms less often. In a trending market this is straightforwardly better.
A smaller multiplier means faster response and far more whipsaw. In a range that is a trade every few bars, each one paying a round trip — say $0.03 a flip, which across 20 flips in a choppy month is $0.60 a share before price has done anything.
There is no setting that gets both. That trade-off is the indicator, and hunting for a value that avoids it is fitting to whichever stretch of history you happen to be looking at.
The original data
Of the 24,971 unique videos in this site’s search study, 133 mention this indicator in the title, at a median of 21,388 views across 101 channels, and 64% of those titles are instruction-shaped. One neighboring band indicator appears in 126 at 3,163 and a five-component system in 151 at 10,245.
133 videos at 21,388, the highest audience per video among the trend indicators measured here. A simple, visually clear output attracts more viewers than a complex one, which is a fact about presentation rather than about which indicator is more useful.
Repeated flips over a short stretch of bars mean the market is ranging. The indicator is reporting that accurately — in a range, price keeps crossing back over a band set a multiple of the average true range away, and a filter built on volatility will flip constantly when there is nothing to filter.
When it fails
The failure is using the flip as an entry signal in a range, and it produces a long series of small losses that each looked reasonable. The line flips, you enter, price returns, it flips back, you reverse. Every trade followed the rule. The market was moving two bars in each direction the whole time, the indicator reported that faithfully, and the account paid a round trip for each faithful report.
The second failure is stopping out on the line. It moves every bar.
A third is acting on an intrabar flip. It can reverse before the close.
A fourth is tuning the multiplier against history. That is fitting.
A fifth is expecting it to anticipate. It confirms, by construction.
And a sixth is porting settings between instruments. The input scales with volatility.
Related
Supertrend covers the calculation itself. Average true range is the measurement it is built from. And trend following is the approach this indicator belongs to.
Treat it as a volatility calculation with a directional presentation and its behavior makes sense. It flips in ranges because the average true range is small there and the line sits close to price. That is the calculation working, not a setting that needs adjusting.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.