Understand a Supertrend Trading Strategy

This guide explains how Supertrend is calculated, the exact trading rules, a worked example, the common settings, when it fails, and how to automate and test a Supertrend strategy.

At a glance

How Supertrend is calculated

Supertrend is commonly attributed to the French trader Olivier Seban. It builds on the Average True Range (ATR), a measure of volatility introduced by J. Welles Wilder Jr.

1. Calculate ATR over a chosen period, such as 10 candles.
2. Find the midpoint of each candle: (high + low) ÷ 2.
3. Draw two bands. The upper band is the midpoint plus the multiplier times ATR, and the lower band is the midpoint minus the multiplier times ATR.
4. Lock the bands so they only tighten. In an uptrend the lower band can rise but not fall; in a downtrend the upper band can fall but not rise.
5. Pick the active line. While the trend is up, Supertrend is the lower band. When a candle closes below it, the trend flips down and Supertrend becomes the upper band, and the reverse.

Example. A candle has a high of 25,100 and a low of 25,000, so its midpoint is 25,050. With an ATR of 80 and a multiplier of 3, the upper band is 25,290 and the lower band is 24,810.

The rules

1. Buy when a candle closes above the Supertrend line, flipping it to an uptrend.
2. Sell or exit when a candle closes below the line, flipping it to a downtrend.
3. Use the line as a trailing stop. While long, the stop is the Supertrend line, which rises with the trend.
4. Optionally reverse. Some versions go short on a downward flip rather than just exiting.
5. For intraday versions, close any open position by 3:15 pm.

Common settings

A higher multiplier keeps you in trends longer but gives back more before exiting. A lower multiplier exits sooner but gets shaken out more often.

A worked example on Nifty futures

This is a hypothetical example, not a result.

• On a 15-minute chart with Supertrend (10, 3), Nifty futures close at 25,080, above the Supertrend line at 25,060. The trend flips up.
• The algo buys one lot of 65 at the next price, 25,085. The initial stop is the Supertrend line at 25,060, a risk of 25 × 65 = ₹1,625.
• As the market rises, the line rises with it. By 2:00 pm, futures are at 25,230 and the line has trailed up to 25,180.
• A candle closes at 25,170, below the line. The algo sells at the next price, 25,168.
• Gain: 83 points × 65 = ₹5,395 before costs.

The trailing line let the trade run during the trend and locked in most of the move.

When Supertrend works, and when it fails

Works best when:

• The market trends steadily in one direction.
• Volatility is stable, so the line does not flip on noise.

Struggles when:

• The market chops sideways, flipping the line back and forth.
• A sharp spike flips the trend and then reverses immediately.
• Volatility changes quickly, widening or narrowing the bands at the wrong time.

Filters

• Higher timeframe trend. Take 15-minute signals only in the direction of the hourly or daily Supertrend. See the multi-timeframe strategy.
• VWAP. Take long signals only above VWAP. See the VWAP strategy.
• Trend strength. Require ADX above a threshold to avoid sideways markets.
• Time of day. Avoid new entries in the first few minutes and the last hour.

Supertrend with options

Some traders use Supertrend signals on the index to trade options: buy a call when the trend flips up, buy a put when it flips down, or sell options against the trend. Option buyers face time decay while waiting for the trend to develop; option sellers face unlimited risk if the trend accelerates. See the option buying strategy and option selling strategies guides.

Position sizing and risk

The stop distance is the gap between the entry and the Supertrend line, which changes with volatility. Size each trade so that hitting the line costs no more than your limit, using the position size calculator. Expect runs of small losses in sideways markets, and check the longest losing streak in your backtest.

Automating a Supertrend strategy

Supertrend's rules are entirely mechanical, which makes it a natural candidate for automation. QuantPower's strategy builder lets you use indicator conditions for entries and exits, add filters and time limits, and run the strategy as a bot. Test the rules in the backtesting engine and paper trading first.

Backtesting tips

• Calculate the line using only past data. The locked-band logic is easy to get wrong in a spreadsheet.
• Test neighbouring settings rather than one perfect pair.
• Fill at the next price after the signal candle closes.
• Include costs, since faster settings trade often.

See how to backtest trading strategies for the full method.

Frequently asked questions

Sources

• Wilder, J. W. (1978). New Concepts in Technical Trading Systems. Trend Research (Average True Range)