The SuperTrend Trading Strategy: Getting To The Root of Trend Following

The root of any good trend following system is always the same: identify the direction a market is trending and ride that trend.

Anyone who has traded a trend following system already knows that this concept can be much more difficult than it appears. Trending markets are filled with reversals, pullbacks, and false breakouts. Periods where markets aren’t trending will often leave traders wondering whether their indicators are still working.

At the root of any good trend following strategy is the ability to identify the direction of a trend. That is exactly where the SuperTrend indicator excels.

Since identifying the trend direction is the root of a good trend following system, let’s take a look at a strategy that is based on identifying the trend.

Mark from Tradinformed recently published backtesting results of a basic Forex system that attempts to implement trend following in its purest form. The system uses the SuperTrend indicator combined with the 200-period simple moving average (SMA) to identify trends on the EUR/USD currency pair.

Here are the basic entry and exit rules for the SuperTrend Trading Strategy as Mark defined them:

Enter Long Position

• When closing price is above 200 SMA and crosses from below to above SuperTrend
• Or when closing price is above SuperTrend and crosses from below to above 200 SMA

Enter Short Position

• When closing price is below 200 SMA and crosses from above to below SuperTrend
• Or when closing price is below SuperTrend and crosses from above to below 200 SMA

Exit Long Position

• When either Profit Target or Stop-Loss is hit
• When trade is opened in the oppposite direction
• When closing price crosses from above to below 25 EMA

Exit Short Position

• When either Profit Target or Stop-Loss is hit
• When trade is opened in the oppposite direction
• When closing price crosses from below to above 25 EMA

Mark backtested this strategy over three separate 20,000 periods of 1-hour bars. He used a 5 ATR profit target and a 1 ATR stop loss.

The backtests started with an account value of $100,000 and ended with a value of over $1.3 million after a period of almost ten years. During that time, the system registered a profit factor of 1.15 with a winning percentage of 29% and a maximum drawdown of 38%.

Obviously, we would like to see a higher profit factor and winning percentage with a much lower maximum drawdown. The interesting thing about this SuperTrend strategy is that there is a lot of room to improve it. Because the strategy is so simple, there are dozens of options to add to it or tweak it in order to get different returns.

Simply adjusting the profit factor or stoploss could have a major impact on the returns. We could also try adding some sort of confirmation indicator to make the strategy more selective.