SuperTrend Strategy

Overview

The SuperTrend strategy is a trend following strategy based on the calculation of Average True Range. It uses ATR to set stop loss lines and determines the trend direction by judging whether the price breaks through the stop loss lines, thus generating trading signals.

Strategy Logic

The strategy first calculates the Average True Range (ATR) over a certain period. Then it uses the ATR value multiplied by a scaling factor to calculate the long stop loss line and short stop loss line. The specific calculation is as follows:

atr = mult * atr(length)

longStop = hl2 - atr 

shortStop = hl2 + atr

Where length is the period to calculate ATR, and mult is the scaling factor for ATR.

After calculating the stop loss lines, the strategy keeps judging whether the price breaks through the stop loss line of the previous bar to determine the trend direction:

dir := dir == -1 and close > shortStopPrev ? 1 :  
         dir == 1 and close < longStopPrev ? -1 : dir

When the long stop loss line is broken, the trend is considered bullish. When the short stop loss line is broken, the trend is considered bearish.

According to the change of trend direction, buy and sell signals are generated:

buySignal = dir == 1 and dir[1] == -1

sellSignal = dir == -1 and dir[1] == 1 

Finally, corresponding trading actions are taken when buy or sell signals appear.

Advantages

1. Using ATR to calculate stop loss lines can effectively filter out market noise and capture more reliable trend signals.

2. The strategy has few parameters which are easy to understand and operate. The ATR period and multiplier can be adjusted to adapt to different market conditions.

3. Using stop loss line breakout to determine trend direction change can effectively control risks and stop loss in time.

4. Configurable for long only or dual direction trading to suit different trading styles.

5. Can be used on any timeframe and for various trading instruments.

Risks

1. In ranging markets, ATR may be pulled higher leading to wider stop loss and more false signals.

2. The optimal parameter combination is uncertain. ATR period and multiplier need optimization based on market conditions.

3. The optimal timeframe for each trading instrument is unknown and needs to be tested.

4. The best entry timing is unclear and some lag exists.

5. There are risks of being not in the market when the trend is weak.

6. There are risks of stop loss being hit. Wider stop loss may be considered.

Enhancement

1. Other indicators like MACD, RSI can be incorporated for filtration to avoid wrong signals in ranging markets.

2. Machine learning or genetic algorithms can be used to find the optimal parameter sets.

3. Parameter optimization can be done for each instrument to find the best ATR period and multiplier.

4. Volume indicators can be used to determine better entry timing and avoid premature entry.

5. Consider using locking strategies to hold positions when not in the market.

6. Stop loss width can be relaxed and optimized with trend strength indicators.

Conclusion

The SuperTrend strategy uses dynamic stop loss lines calculated from ATR to detect trend changes when price breakout occurs. It is a relatively reliable and risk-controlled trend following system. The strategy is simple to use and applicable to various instruments, but parameters and rules need optimization for better performance across different markets. Combining with other technical indicators and strategies can further improve trading results. In general, SuperTrend is based on scientifically sound concepts and is worth further research and application by traders.