Supertrend shows direction with one trailing line set a multiple of ATR away from price. The rules that move the line, and its weaknesses.
Supertrend draws a single line below or above price to show whether the market is currently on the up side or the down side. While it reads bullish, the line follows price up from below; while it reads bearish, it follows price down from above. The distance between the line and price is set by ATR (average true range), so the more a coin swings, the farther away the line sits. ATR itself is covered in the article on measuring volatility with ATR.
For each bar, two candidate lines are calculated first. The upper band is (high + low) / 2 + multiplier × ATR, and the lower band is (high + low) / 2 − multiplier × ATR. The defaults for TradingView's built-in Supertrend are a 10-bar ATR and a multiplier (factor) of 3, and this site's Supertrend Scanner and backtester use the same defaults. Because ATR is a Wilder-style average, the values over the first few dozen bars can differ slightly depending on where the calculation starts. In an uptrend the lower band, and in a downtrend the upper band, becomes the Supertrend line you see on the chart.
The key to Supertrend is that the line never steps back. In an uptrend, the line is raised only when the newly calculated lower band is higher than its previous value; if it is lower, the previous value is kept. So while price rests or pulls back, the line stays flat, as in the figure, and when price rises again, the line follows it up. It is also called a ratchet, after the gear that turns only one way. In a downtrend, the reverse applies: the upper band only moves down. The only time the line steps back is when a close crosses it and the direction flips.
In an uptrend, a close below the lower line flips the direction to bearish; in a downtrend, a close above the upper line flips it to bullish. Because the close is what counts, a wick that pokes through the line mid-bar and comes back is not a flip. A cross on a bar that is still forming can disappear before the bar closes, so the Supertrend Scanner marks this separately as a 'pending flip'. When a flip happens, the line jumps to the opposite band, so on the chart it moves from below price to above it, or from above to below.
Since the line follows price and never steps back, it is commonly used as a trailing stop. In an uptrend, that means closing the position when a bar closes below the line, and the distance to the line is the stop distance at that moment. Two things are worth knowing here. The flip is confirmed by the close, so the price at which the position is actually closed is often lower than the line. The flip bar in the figure closed about 1.7% below the line. And with a multiplier of 3, the line usually sits close to three ATRs away from price, so the stop distance is wider than you might expect. If you use leverage, the Futures Liquidation Calculator lets you check whether that stop would be reached before the liquidation price.
In a trendless range, price crosses the line every time it travels between the top and the bottom of the range. A bullish flip is confirmed only after price has already risen a good deal, and a bearish flip only after it has already fallen a good deal, so following the flips as they come means buying near the top of the range and selling near the bottom, over and over. Following the flips in the figure at the close of each flip bar, all four buys made on bullish flips would have been sold at a lower price on the next bearish flip. These frequent false signals are called whipsaws, and they are a weakness shared by trend-following indicators.
A larger multiplier moves the line farther from price, so ordinary swings no longer cross it and flips become fewer. Using a multiplier of 5 on the same range cut the flips from nine to five. In exchange, flips come later, and because the line is farther from price when they do, more is given up each time. A smaller multiplier does the opposite. The ATR period matters too: the shorter it is, the more sensitive the line is to recent swings. There is no single right setting, and results differ by coin, bar length and period, so you can compare them in the backtester by changing only the setting under the same conditions.
Supertrend's direction boils down, in a single line, to one question: has price moved against the current direction by more than a multiple of its recent swings? It does not tell you whether the trend will continue or how far price will go after a flip. Looking back over one long trend, its results can easily look good, but you only see the full picture when you also count the small losses that piled up in the ranges along the way. Results after flips were not measured in this article, and they can differ greatly between coins and bar lengths. Showing direction simply, with a single line, is both Supertrend's strength and its limit.
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