TRADING RUSH
Learn about the Supertrend trading strategy, its win rate, and some disadvantages after being tested 100 times. Combine it with the 200 period exponential moving average for better results. Use a fixed stop loss and profit target, but also consider setting your own stop loss using price action levels when the Supertrend stoploss is too far from the entry. The win rate of the Supertrend strategy is approximately 46 percent, but it can still be profitable.
Testing Supertrend Indicator: The Real Win Rate and Limitations
Introduction to trading indicators
If you are interested in trading, you must have heard about trading indicators. They are used by traders to predict the movement of the market and identify trading opportunities. In this article, we will focus on one of the popular indicators, the Supertrend Indicator, and its trading strategy.
What is the Supertrend Indicator?
Supertrend is a simple indicator that shows whether the current trend is up or down. A simple line changes its color based on the current trend. Usually, the colors are green and red, indicating an uptrend and a downtrend, respectively. It is similar to a moving average on a chart that gives crossovers time to time.
How does Supertrend Indicator Work?
Supertrend Indicator helps traders to find the direction of the trend. When the Supertrend line is below the price, the color of the indicator will turn green. Similarly, when the Supertrend indicator is above the price, the color of the indicator will turn red.
This way, the Supertrend Indicator is trying to show the current Price Trend. It shows the direction of the trend. When the Supertrend indicator is green in color and is below the price, the price is considered to be in an uptrend. Similarly, if the Supertrend indicator is above the price and is red in color, there is a downtrend going on.
Using Supertrend Indicator as an Entry Signal Generator
While Supertrend Indicator is primarily used to find the direction of the trend, people have figured out a way to use it as an entry signal generator. The simple Supertrend entry strategy goes as follows:
You buy when the Supertrend indicator flips below the price, and the color of the indicator changes to green. You set your stoploss at or below the Supertrend indicator. You sell when the Supertrend indicator flips above the price, and the color of the Supertrend changes to red. You set the stoploss at or above the Supertrend line.
Exiting Trades using Supertrend Indicator
Once you have entered the trade using the Supertrend Indicator, you can use the same indicator to exit. If you are a trader that doesn’t use a fixed stop loss and profit target, you can use the Supertrend line to trail your stop loss.
When the Supertrend indicator turns green and flips below the price, you can enter the long trade and trail the stoploss just below the Supertrend line. Eventually, the line will flip over the price, and then you can completely close your long position.
If you have entered a short position when the Supertrend flipped to red color, you can trail your stop loss using the Supertrend line.
Disadvantages of Using Supertrend Indicator
While the Supertrend Indicator is useful, there are some limitations to using it as an entry signal generator.
1. The Supertrend Indicator only shows the current direction of the trend. It cannot predict the trend direction. Therefore, it is better to use the 200 period moving average with the Supertrend indicator if you are using it as an entry signal generator.
2. You cannot blindly take every trade given by the Supertrend Indicator. If you do, you will end up taking trades in the opposite direction of the long term trend as price gives many pullbacks in a long-term trend.
3. While testing the strategy 100 times, it was found that there were losing trades and not getting a good risk to reward ratio because the stoploss set using the Supertrend Indicator line was too far from the entry. This was the reason why the stoplos hit in most cases before the profit targets were hit. In such cases, you can set your stoploss using simple price action levels when the Supertrend stoploss is way too big.
Testing Supertrend Indicator: Real Win Rate
The Supertrend Indicator Trading Strategy was tested on the Euro JPY pair using the Trading Rush App. Since other indicator strategies had a fixed stop loss and profit target, this strategy also had the same.
During the backtesting, the win rate of the Supertrend strategy was approximately 46 percent with a 1.5 to 1 reward risk ratio. Even with this win rate, using this strategy was still profitable. The Supertrend Indicator Trading Strategy can help traders make a profit even with a low win rate.
Conclusion
The Supertrend Indicator Trading Strategy is a simple yet effective strategy. It helps traders to find the direction of the trend and provides entry and exit signals. Even though it has some limitations, it can still be a profitable strategy if used correctly.
Therefore, it is important to always test your strategies using backtesting or a demo account before using them in real trading. Use the Supertrend Indicator as a tool to find the direction of the trend and set your stops using simple price action levels where the Supertrend is too far from the entry.
Always remember, there is no perfect strategy, and every strategy has its limitations. As a trader, it is essential to be prepared for losses and manage risk effectively.
