Last Updated on September 12, 2018 by Mark Ursell
In this article, I show a trading strategy that uses the SuperTrend indicator to trade the EUR/USD forex pair.
I also show you how you can take this basic strategy and refine it to make it your own. See below for information about how you can test your own strategies and purchase the spreadsheet described in this article.
I have written a number of times about the SuperTrend technical indicator. If you want to read more check out the article links at the bottom of the page.
The SuperTrend is an interesting indicator because it combines price action with recent volatility to set the indicator levels. It also looks great on the chart and is really easy to use.
SuperTrend Trading Strategy
In the strategy, I used the EUR/USD on the daily timeframe from 2002 to 2016.
Entry Filter: Linear Regression Line
I am using the Linear Regression as a filter to identify the market direction. The Linear Regression line is a statistical tool that identifies the best straight line fit through the price. I find it a very helpful tool in my trading. In the basic strategy I use a 50 period Linear Regression line.
- When the Linear Regression line is pointing upwards only enter Long Trades
- When the Linear Regression line is pointing downwards only enter Short Trades
Entry Trigger: SuperTrend
The SuperTrend is designed to follow the trend. However, I am using the Linear Regression to identify the trend. So I am going to reverse the SuperTrend and enter Long when the indicator turns negative. The logic of this is to enter on a temporary weakness in the expectation that the market will continue in the direction of the trend. I use the standard settings of a 20 period lookback period and an offset of 2.
- When the SuperTrend turns negative Enter Long Trade
- When the SuperTrend turns positive Enter Short Trade
Exit: Bollinger Bands
Bollinger Bands are another indicator that I use regularly. They are a good way to set exit levels that adjust to market conditions. In this strategy I want to exit long trades on a close above the Bollinger Bands and short trades on a close below.
- When close is above the upper Bollinger Band Exit Long Trade
- When close is below the lower Bollinger Band Exit Short Trade
The basic version of this strategy has a Profit Target and Stop-Loss of 10 times the ATR.
Basic Strategy Results
|Gross Winning Trades||$249,317|
|Gross Losing Trades||$-140,702|
|Percentage Winning Trades||68.1%|
|Average Winning Trade||4,021|
|Average Losing Trade||-4,852|
|Largest Winning Trade||$14,576|
|Largest Losing Trade||$-18,761|
Make the Strategy Your Own
One of the key steps to becoming a successful trader is to trade a strategy that fits your personality. Everybody has their own natural style of trading. This might be whether you like to trade trends or reversals. Whether you like to take profits quickly or leave them to run as far as possible. What type of indicator you like and what timeframe you use.
The best way to discover and refine your strategies is to test them using historic data. One of the easiest ways to do this is to use a Tradinformed Backtest Model. These are spreadsheet based models and can be used by anyone with some basic Excel skills.
In the video below I demonstrate how easy it is to change the strategy. I change the model from using a Linear Regression filter to using an EMA filter.
Improved Strategy Results
|Gross Winning Trades||$296,593|
|Gross Losing Trades||$-126,130|
|Percentage Winning Trades||70.1%|
|Average Winning Trade||4,862|
|Average Losing Trade||-4,851|
|Largest Winning Trade||$16,875|
|Largest Losing Trade||$-21,272|
Changing the filter from the Linear Regression to the EMA showed a clear improvement in this strategy over the assessment period. The improved strategy has a higher overall profit and an improved profit factor. It also has a higher number of winning trades.
This test shows that small adjustments to a strategy can sometimes make big improvements. It would be easier to further improve this strategy by testing different factors.
Check out the video to see the strategy and spreadsheet demonstrated.
In this article I show how you can calculate the SuperTrend using Excel. If you want to use the SuperTrend in MT4 check out this article: Create a Custom EA using the SuperTrend.