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The trend follower par excellence

The Supertrend

The Supertrend is a trend following indicator created by Oliver Seban, French writer and author of the manual “Tout le monde mérite d’être riche”, translated  “Everyone has the right to be rich”. Successful entrepreneur, only 32 years old, following initial failures, he founded a computer company that led him to success and after a few years he retired to private life devoting himself to the study of financial markets.

Seban designed the Supertrend in 2000, an indicator created to identify the moments of the beginning of the trend and to optimize the timing of entry and exit from the market.

One of the strengths of the Supertrend is its use in any time frame. In fact, it can be used both on a 1-minute chart and on a monthly chart; it will be the trader who identifies the appropriate time frame based on the study of the chosen financial instrument.

Construction, characteristics and set-up

The main feature of the Supertrend is its construction based on the average volatility of the financial instrument in a specific reference period (Average True Range), a feature not present in other trend-following indicators. In fact, the inclusion of volatility allows to filter false signals of possible corrections or rebounds, thus avoiding early exits.

The Supertrend is calculated on 2 fundamental elements therefore: the volatility or the Avarage True Range (ATR) based on a specific period, and a multiplier coefficient of the ATR.

The standard SUPERTREND setting provides for an ATR calculated over 10 periods and a multiplier coefficient of the ATR equal to 3.

The values of the ATR multiplier and the observation period can be set and adapted at the operator’s discretion, based on the trading strategy applied to the financial instrument studied.

Supertrend – ATR setting 10 periods with multiply factor 3

At higher period and multiplier values, less frequent signals will coincide, effectively eliminating the market background noise; conversely, a shorter period with a lower multiplier will produce a greater number of signals.

Supertrend – ATR setting 1 period with multiply factor 1

How it works

Unlike many other indicators and oscillators, the Supertrend directly overlaps the chart examined, allowing a quick view of the current trend and the study of possible entry and exit points from the market.

Nell’esempio sotto riportato, si presenta con due linee, verde e arancio. Nel In the example below, it shows two lines, green and orange. When we are in an ascending trend, the line has a green color, vice versa, if the current trend is descending, the line is orange. The orange line of the Supertrend assumes the role of dynamic resistance, on the contrary, the green one is a dynamic support line.

When prices cross one of the two lines of the Supetrend with the closing of the candle of the chosen time frame, it will change color. If we are in a defined trend, the overcoming of the Supertrend confirmed by the closing of the candle indicates with probabilistic calculation, a trend inversion that can be used for a market entry.

It is important to remember that it is preferable to filter the SUPERTREND input and output signals through the simultaneous use of other oscillators and / or indicators.

The Supertrend is a particularly suitable indicator for the trending phases and not very usable for the lateral phases; since it is a trend following indicator, it is good to remember that it always provides a signal that lags behind the price values.

Supertrend as a price target

SUPERTREND can be used as price targets. The lines generated by the SUPERTREND, whether they are resistances or supports, are in fact the targets for taking profits or closing positions in our studies.

If we are faced with a trend reversal from UP to DOWN with a SELL signal generated, we can use this signal as our profit target and close the position of our studies.

Conversely, if from a descending trend, we observe a BUY signal, we can open a new position, waiting for the SELL signal with Target Price.

Obviously the same is also valid for operations studied in SHORT, opening positions on the SELL signal and closing them on the BUY signal.

The setting of the SUPERTREND indicator is linked both to the trading style of each of us and to the type of financial instrument we are studying.

Supertrend – Target price Example

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