SuperTrend Indicator Forex Trading Strategy

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SuperTrend Indicator

Trading with the trend is probably one of the easiest ways to make money out of forex trading. Trading with the trend means trading with less resistance as it implies trading in the direction of the flow of the market. The question is how we identify trend direction accurately.

Here we will be discussing about a strategy that makes use of an indicator that is very effective in identifying trend direction.

SuperTrend Indicator

The SuperTrend indicator is a custom technical indicator which was developed to help traders identify the direction of the forex pair’s trend. With this in mind, the SuperTrend indicator can be best described as a trend following technical indicator.

The SuperTrend indicator is computed based on the Average True Range (ATR). The ATR is a main underlying factor how the SuperTrend indicator identifies trend direction.

One of the more popular ways traders identify trend direction is by observing for reversals that move a certain distance against the current trend direction. For example, a trader may hypothesize that a trend has reversed if price action goes against the current trend by more than 3x the current ATR. If price does reverse by more than 3x the ATR, the market is considered to be reversing. The same concept is adhered upon by the SuperTrend indicator.

The SuperTrend indicator plots a line on the price chart to indicate the direction of the trend. A lime line plotted below price action indicates a bullish trend, while a red line plotted above price action indicates a bearish trend.

The distance of the line can also be adjusted based on the multiplier.

Trend reversals are indicated by the SuperTrend indicator based on the shifting of the line and the changing of its color. Traders may use this as a trend reversal entry signal.

The SuperTrend line can also be used as a basis for setting up a trailing Stop Loss.

Average True Range

The Average True Range (ATR) is a basic volatility indicator which helps traders objectively identify the strength of a currency pair’s volatility.

The ATR simply averages identifies the movement range of each price candle based on pips. It then averages out the pip range of each candle within the specified period.

The result can be used to assess the volatility of the market at any given time.

The Trading Strategy

This trading strategy is a simple trend reversal strategy based on the signals provided by the SuperTrend indicator. However, instead of taking every signal that is produced by the indicator, trade setups are filtered based on a long-term trend.

The long-term trend is identified using the 200-period Simple Moving Average (SMA). Long-term trend direction is based on the general location of price action in relation to the 200 SMA line, as well as the slope of the 200 SMA line. Trades are taken only in the direction of the trend.

The entry signals are based on the shifting of the SuperTrend line as well as the changing of its color. Trend reversal signals that adhere to the direction of the long-term trend are considered valid.

The ATR is then used as a basis for the stop loss as the SuperTrend line is also based on the ATR.

Indicators:

  • 200 SMA
  • SuperTrend
  • Average True Range

Preferred Time Frames: 30-minute, 1-hour, 4-hour and daily charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • Price action should be above the 200 SMA line.
  • The 200 SMA line should slope up.
  • The SuperTrend line should change to lime and should shift below price action.
  • Enter a buy order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss at 3x the ATR.

Exit

  • Close the trade as soon as price closes below the SuperTrend line.

SuperTrend Indicator

Sell Trade Setup

Entry

  • Price action should be below the 200 SMA line.
  • The 200 SMA line should slope down.
  • The SuperTrend line should change to red and should shift above price action.
  • Enter a sell order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss at 3x the ATR.

Exit

  • Close the trade as soon as price closes above the SuperTrend line.

 

SuperTrend IndicatorSuperTrend Indicator Trading

Conclusion

This trading strategy is a basic trend reversal strategy which is based on the SuperTrend indicator. In fact, there are many traders who trade solely based on the SuperTrend indicator.

This strategy however attempts to improve on the already effective SuperTrend indicator by aligning trade setups with the long-term trend and filtering out trades that do not adhere with the long-term trend. This significantly increases the likelihood of a successful trade setup as price usually tends to move in the direction of the long-term trend.

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