The Supertrend explained simply

The Supertrend became popular mainly through charting tools such as TradingView. It builds on volatility, measured with the ATR, and draws a line at a fixed distance from it. Many use it as a simple trend indicator and as a trailing stop.

What it's about

When the line is below the price, the trend counts as up, often coloured green. When it's above, as down. When the price closes on the other side of the line, it switches sides.

An example: a stock is rising, the line sits €4 below it and follows along. If the price one day falls below the line, it jumps above the price. Anyone using it as a stop is out.

How it's calculated

You take the midpoint between the day's high and low and subtract three times the ATR. That gives the lower line. The upper line comes from adding three times the ATR. In an uptrend the lower line may only rise, never fall.

With numbers: high €91, low €89, so the midpoint is €90. The ATR is €1.30. The lower line sits at €90 minus €3.90, so at €86.10.

What signals traders read from it

• Flip: When the line jumps below the price, many read it as a buy signal. When it jumps above, as a sell signal.
• Trailing stop: During a trend the line serves as an exit point that moves along automatically.
• Filter: Some only trade other signals in the direction the Supertrend currently shows.

Where it misleads you

The Supertrend also comes late. It only flips once the price has already moved a good distance in the new direction. In sideways phases it switches sides often, and every switch costs money.

The settings make a big difference. With factor 2 it flips often and exits early, with factor 4 rarely and gives back a lot of profit. There's no one right setting, and one that fits perfectly in hindsight is usually overfitted.

An example trade with made up numbers

Mia has €10,000 in her account and risks at most €150 per trade. The Supertrend on a stock flips below the price, with the line €4 below it. Mia buys at €90 and sets her stop loss at €86. With that distance, she buys 37 shares for €3,330. Costs: €1 each to buy and sell, plus about 2 cents of spread per share on each order.

If it works: The trend runs until the line flips back at €98 and Mia sells. Mia is €296 ahead. After €2 in fees and €1.50 in spread, €292.50 is left.

If it goes wrong: The price turns shortly after the purchase and the line flips back. The stop fills at €85.90. That's a €151.70 loss, €155.20 with costs.

Because the line was €4 away, Mia could only buy 37 shares. The Supertrend set her position size, not just her entry.