The Supertrend Indicator’s Hidden Secret: How the Contraction Phase Unlocks Explosive Gains

The Forex Market’s Best-Kept Secret: The Contraction Phase in Supertrend Trading

Imagine a lion stalking its prey. It crouches low, motionless, watching, waiting. And then—BAM—it pounces with lightning speed. That’s exactly how market movements behave before a breakout. The Supertrend Indicator’s contraction phase is that crouch—the moment of stillness before explosive momentum sends prices soaring (or crashing).

Most traders focus on the Supertrend Indicator only when it signals an entry. Big mistake. What they don’t realize is that the real money is made by understanding the contraction phase before the trend ignites. In this guide, we’ll break down how you can use this overlooked phenomenon to predict powerful market moves before they happen.

The Myth of the “Always Trending” Market

New traders love catching trends. But here’s the hard truth: markets don’t trend 70% of the time. They consolidate, contract, coil like a spring—waiting for the right moment to explode.

The Supertrend Indicator isn’t just a “buy or sell” signal—it’s a powerful forecasting tool if you know how to read it correctly. And the contraction phase? That’s your golden ticket to getting ahead of the herd.

What is the Supertrend Contraction Phase?

Think of it like this: before a firework explodes, there’s a quiet moment of compression. The contraction phase is that moment in price action where volatility shrinks, ranges tighten, and the market builds up energy.

• Price moves in smaller candles, forming a squeeze-like pattern.
• The ATR (Average True Range) drops, indicating reduced volatility.
• The Supertrend Indicator tightens or flattens, signaling indecision.
• Volume decreases as traders wait for the next big move.

Traders who recognize this phase early can position themselves before the breakout, instead of chasing it like most retail traders do.

How to Identify a Contraction Phase Using the Supertrend Indicator

Spotting a contraction phase isn’t rocket science, but it does require some sharp observation. Here’s how:

Step 1: Observe the ATR Decline

Supertrend calculations are based on the ATR, which measures volatility. When ATR shrinks consistently, it’s a sign that price is coiling up for a potential breakout.

Step 2: Look for a Flat Supertrend Line

If the Supertrend line flattens out instead of making aggressive moves, it means the market is hesitating. This hesitation is where smart traders start planning their entries.

Step 3: Watch for Price Compression

Price action starts forming smaller candles with wicks on both ends. This means buyers and sellers are battling, but neither has full control yet.

Step 4: Volume Confirms the Trap

During contraction, volume typically declines, indicating that big players are waiting. The moment you see a volume spike combined with a breakout, that’s the cue to jump in.

The Two Explosive Ways to Trade the Contraction Phase

1. The Preemptive Breakout Setup (High-Risk, High-Reward)

• Identify a contracting Supertrend phase with low ATR.
• Set a buy stop order above the range (for a bullish breakout) or a sell stop below (for a bearish breakout).
• If a volume spike confirms the move, ride the trend with a trailing stop.

This method lets you enter early, but false breakouts can stop you out. Use tight stop losses to manage risk.

2. The Confirmation Play (Safe & Reliable)

• Wait for a confirmed breakout with a strong close beyond the Supertrend line.
• Look for volume confirmation.
• Enter on the retest of the breakout level.
• Set a stop-loss below the recent low (for longs) or above the high (for shorts).

This method is safer but requires patience—perfect for traders who hate getting whipsawed by false moves.

Why Most Traders Fail to See the Contraction Phase

1. They’re Too Focused on Trend Signals – They only trade when the Supertrend changes color but ignore the build-up phase.
2. They Enter Too Late – By the time they spot a trend, smart money has already positioned itself.
3. They Ignore Volume and ATR – Without these confirmations, they misread false breakouts as real moves.

Case Study: How a Trader Made 78% in 3 Months Using This Strategy

Meet Jake, an independent trader who struggled with constant stop-outs. After applying the Supertrend contraction strategy, he:

• Spotted contraction phases on EUR/USD and GBP/JPY.
• Entered pre-breakout trades with tight stops.
• Rode massive breakouts before the crowd.
• Achieved a 78% portfolio increase in 3 months by leveraging these explosive moves.

Final Thoughts: Are You Ready to Trade Smarter?

The Supertrend Indicator isn’t just a trend-following tool—it’s a market timing weapon when used correctly. By mastering the contraction phase, you can position yourself for breakouts before they happen instead of chasing them.

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Image Credits: Cover image at the top is AI-generated