What is SuperTrend?

Supertrend is an objective indicator invented by Olivier Seban. In my experience, this has to be one of the best performing trend indicators. I have always been a firm believer that before using any indicator or tool, it is important to understand the core idea behind its construction. In this newsletter I delve into the construction of Supertrend, its uses and look at some examples on chart.

This discussion is based on candlestick charts.

Calculating Super Trend

Super trend has 3 components:

1. Range price,

2. Average True Range, and

3. Multiplier.

Let’s understand these components individually.

Range refers to the midpoint of a particular candle. It is calculated as (High + Low)/2.

Average True Range (ATR) is a indicator used to gauge the volatility of an instrument. ATR is the average of the previous True range. True range is calculated as

True Range = Max (A,B,C),
where A = (High – Low), B = Abs (High – Prev close), and C = Abs (low – Prev close).

Super trend uses 14 period ATR in it’s calculation. Therefore, 14-period ATR =(n1+n2+n3+n4+………+n14)/14.

Where n is the Max value.

Multiplier is the constant used to give buffer between current market price and Supertrend line. ATR is the true range of the price. This means the price is bound to move within this range. Setting the multiplier at 3 is a great rule of thumb. However market participants can change the multiplier based on their use case and study

Plotting of super trend

When Super trend is plotted, two values are calculated.

• Bullish Trend Indicator = Range price - (3 x ATR)

• Bearish Trend Indicator = Range price + (3 x ATR)

If the price is trading above bullish trend indicator value, it is a bullish super trend.

If the price is trading below bearish trend indicator value, it is a bearish super trend.

Although both trend indicator values are calculated, only one of them is plotted based on the closing price.

Uses of super trend:

Super trend has 2 use cases:

• Trend Filter, and

• Identification of patterns.

As a trend filter, when price is trading above the super trend, the trend is considered to be bullish. When price is trading below the super trend, the trend is considered to be bearish.

When the super trend is flat, it means the ATR is increasing but the price is not. Increase in ATR shows volatility. Flat Supertrend indicates towards consolidation. When the Supertrend is rising or falling, it shows that ATR is not increasing or falling but the price is. This shows trending price. Focus on consolidation breakout when super trend is flat and focus on continuation patterns when super trend is rising or falling.

Observe the chart below. The super trend is set at the default value of 10-period and 3 multiplier. When the Supertrend was flat, the price was consolidating. The price consolidated for almost 2 months and later gave a breakout. The pattern formed when the super trend was flat was an ascending triangle.

Observe the chart below. The stock could have been shorted at every Market Structure High (MSH) pattern that was forming below the super trend. I have discussed about market structures in my course ‘How to Trade Candlestick’.

In this newsletter, I have used SuperTrend on Candlestick chart, the logic remains the same for the Noiseless charting family as well. The Indicator has been promising because of its objective way of calculation. I have explored further examples in my YouTube video 👇🏻