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Easy Supertrend Indicator Trading System One of the more popular forms of trading is called “trend trading”. This is where you define the dominate price price trend and trade in in that direction. Trend following was made popular by the Turtle Traders and although buy and hold has lost its popularity, trend following is still very popular. Using the Supertrend indicator as part of a trend t rend following system, we are going to be able to make our trading 90% mechanical which will help leave all biases and “gut feelings” out of the trading equation. As with any Forex any Forex trading system that is on this website, website, you must back must back test test to ensure you understand the system fully. The great thing is that your trading is not based on forecasting. Trend following t ruth is the price. is a reactive form of trading because in the end, the only truth Forecasts are meaningless.
“Let’s break down the term trend following into its components. The first part is trend. Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices – following’is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then follow it.” – Van Tharp The Supertrend trading system seeks to capitalize on the long term trend using shorter term trends to get on board for the price move.
Supertrend Trading System Indicators And Settings We will use 3 indicators for this supertrend supertrend strategy however one of them is help determine our stop loss placement on the trade.
Supertrend Indicator – Settings of period 8 and multiplier of 1.5 Simple Moving Average – 200 period ATR – This measures volatility and we will use 14 periods and 1.5 X for risk
The Supertrend Indicator can be downloaded for Metatrader by clicking here. The actual supertrend indicator will be used for:
Green will be for a buy signal Red will be for a sell signal
Our 200 period moving average is the longer term trend direction.
If price is above the moving average, we look to buy when supertrend turns green If price is below the average, we look to t o sell the red supertrend signal
We are using the Average the Average True Range Range indicator to determine our stop loss. loss. For example, if the ATR reading for the EURUSD is 100 pips, we will use 1.5 X 100 to get a pip stop location at 150 pips below or above our o ur trade entry.
Supertrend Trading System Explained This Forex trading system is simple in execution but can be very difficult depending on your ability to manage m anage risk and losing trades.
We have applied the moving the moving average and Supertrend indicator on this daily chart of the EURJPY. Let’s walk through the labelled labelled section of the chart for a sell position. 1. 200 SMA is sideways and price is whipsawing back and forth over the line. We also have rapid changes changes in the supertrend supertrend from red-green-red-green. We would want to stand aside from from trading especially is you are a conservative trader 2. This highlights the downtrend and we can see the moving mo ving average has turned over and price is fully under the average. We are only looking for shorts. 3. Here we have the first green to red since the downtrend has been confirmed. We short at the close of the candlestick candlestick the turned the indicator indicator to red. 4. This is one exit we can use and it’s when price breaches and closes above the 200 day moving average READ 1 Hr Swing Swing Forex Trading System Here are some number for this trading setup:
Entry was at the close: 131.57 Stop was based on ATR of 1.2026 X 1.5 = 1.8039 1 .8039 + 131.57 = 133.37 Exit was at confirmed candlestick close over 200 SMA 118.79 Pip total = 1278 or 7R (7 times what was risked)
All trades will not play out like this and and there will times when when you are trading in choppy market conditions long before price registers whipsaws along the 200 SMA.
Multiple Time Frame Trading With Supertrend We can make this trading trading strategy even simpler by using using the supertrend indicator on two time frames. For a daily trading chart, we can use the supertrend trend determination on the weekly. This is the daily GBPUSD chart and the green line indicates that the weekly trend is up according to the supertrend indicator that turned where the green line is.
This daily chart has already turned green before the previous week closed that gave us the signals for long trades only. The yellow line indicates a potential resistance point that is in place before the weekly trend is up. We can look to get in sync with the the chart condition and take a long trade when price breaks the resistance area on close. The issue now is that entry candle is huge and while you can make a rule in regards to large candlesticks, for this t his example we will keep in line with the rules.
Entry price is 1.2821 ATR is 1.2821 – (91 pips pips x 1.5) 1.5) = 1.2684 stop price
This trade is stopped out on the extreme retrace that pulls back for a test of resistance (potential support) for a 137 pip loss. We can re-enter when when supertrend turns green green at 1.2817. Our stop using the 1.5x ATR method is at 1.2686. The trade is currently in profit of 167 pips from a peak profit point of 450 pips
DISADVANTAGES OF THE SUPERTREND TRADING STRATEGY You can see one of the main disadvantage of the Supertrend Supertrend strategy on the the last chart. The pullback in price has seen a few hundred pips disappear. Not many traders can stand seeing profits evaporate like that. That’s always been one of the kicks against trend following and that is you will sit through extreme pullbacks, even go into draw down and never see the trade recover. You MUST have strong risk management skills or you will quickly eat your account into zero.
These trades can run a long time t ime and you may be tempted to exit the trade due to: Greed – Seeing all the pips accumulate and how many things the winnings can
buy Fear – Seeing all the profits disappear
All that said, there is one huge reason why you’d want want to trade something like this Forex system
ADVANTAGES OF THE SUPERTREND FOREX TRADING STRATEGY The trend is confirmed and you enter what may become a trend that lasts weeks, months, or even years. This trade in the USDJPY ran for 311 days and booked 1785 pips with an initial risk of 74 pips giving you an R multiple of 24. Hope you can see the massive potential in this trading strategy.
Remember we used the setting of 8 and 1.5 for supertrend? supertrend? We never changed changed those inputs when using the multiple time frame approach. If we used the default settings of 10,3, and kept the trading chart at 8, 1.5, this same trade gave up 3847 pips!
