What it means
Supertrend draws a line below price in an uptrend and above price in a downtrend. The line is the candle midpoint minus (or plus) a multiple of ATR, and it only moves in the trend direction. When price closes through it, it flips.
Common settings: ATR 10, multiplier 3. This drawing uses ATR 5, multiplier 1.5.
Why traders use it
It turns volatility into a trailing stop. Traders use it for direction and for exits.
Chart examples
Supertrend flips with the trend
How to identify it objectively
- 1Green line under price: uptrend.
- 2Red line above price: downtrend.
- 3A close through the line flips it.
- 4Higher multiplier: fewer flips, later signals.
Bullish use
- 1Supertrend flips green.
- 2Enter on a pullback that holds above it.
- 3Exit or reverse when it flips red.
Bearish use
- 1Supertrend flips red.
- 2Enter on a rally that fails below it.
- 3Exit when it flips green.
What confirms it
- Structure agrees with the flip.
- ADX or another filter shows trend.
What invalidates it
- Frequent flips: ranging market.
How a hypothetical setup is built
Entry
After a flip, on the first pullback to the line.
Stop
Beyond the Supertrend line.
Target
Trail with the line until it flips.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
- Technical IndicatorsATR (Average True Range)
- Technical IndicatorsADX, +DI and −DI
- Technical IndicatorsIchimoku Cloud
Historical testing
Not tested on The Tradeskill.
Limitations: when it fails
- Whipsaws in ranges.
- Exits late after sharp reversals.
- Results depend heavily on settings.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.