Supertrend Indicator

Technical analysis is mostly used by traders to spot trades using multiple indicators and chart patterns. Such types of indicators can help to identify buy or sell signals in a trending market. The Supertrend indicator can be used to trade across multiple time frames and make your trading more efficient than ever. Based on specific parameters, the Supertrend indicator has been proven to help traders decide wheater to buy or sell a stock. Some traders consider it as one of the best indicators for day trading

The Super Trend indicator, developed by Olivier Seban, is popular as it helps traders correctly identify buy and sell signals and the degree of price volatility. The Super Trend indicator often indicates the direction of price movement in the trending market. The price movement always follows a certain path.

It is plotted on stock price charts for traders to see a clear current trend. If the current price is above the Supertrend-trendline, it is considered bullish. If the price is below it, then it is considered bearish.

The Supertrend indicator may relatively lag, and because of that, sometimes entry and exit can be late. However, setting lower parameters may reduce false signals.

Supertrend Indicator

Supertrend Indicator On Your Charts

To use the Supertrend indicator in trading, open the specific stock chart you want to track. Next, choose your favorite intraday timeframe, or a higher any other of your choice.

Many charting tools can be used, but not all support this technical indicator. The chart above is created with TrendSpider.

Once you opened a new chart with your favorite timeframe, insert the Supertrend indicator and keep the setting as 14 and 3. The settings can be modified accordingly based on your preference and backtesting results.

The signals go like this; in a long position, you can directly specify the stop-loss on the indicator line once the price crosses from above to below the Supertrend. However, if your position is short, it is vise versa for the indicator line.

Using the Supertrend indicator in conjunction with a stop loss is one attempt for trading. An alternative is to use the indicator as a filter or in addition to your current toolset.

Calculation Method Explained

The super trend indicator is based on two main dynamic values. They are namely the Average True Range (ATR) and the so-called Multiplier. The Average True Range is a well-known technical indicator that provides an estimate of market volatility by decomposing the stock price range over a period of time.

The true range is the first step in the calculation. It considers the highest values of the three components

  1. high current period minus low current
  2. high current period minus previous close
  3. low current period minus previous close signals.

Suppose you choose the setting 14 and 3. In that case, this calculation will be done for the past 14 periods, where the true range is calculated by taking the highest value of each period for the three different price differences mentioned above.

Once all TR values are calculated, divide the total number by the number of periods represented 14. This will further help in calculating the trend in ATR.

The second step is to calculate the median price of the most current candle. The formula is [high+low+close]/3.

Finally, in the third step, you have the multiplier. In our example, it is 3. This factor represents the number of times you add the ATR to the last candle’s median price.

So it is like this: Median of last candle * Factor * ATR.

The Supertrend indicator can be added on most trading platforms, and both values, ATR and Multiplier, can be changed.

The ATR is multiplied by the multiplier. Traders commonly use fourteen periods and a multiplier-length of 3. Shorter values can bring up more signals and greater sensitivity to price changes. A longer value of n can distort the sanity of daily price action. It may also result in having lesser signals to trade.

Trading Strategy in the Stock Market Using Supertrend Indicators

Supertrend and a 5-20 exponential moving average cross can be combined to reduce the number of signals by improving the quality of signals at the same time. When Supertrend is below the price, and the 5 EMA is above the 20 EMA, a buy signal is generated. When the current price is below the Supertrend, and the fast 5-day EMA is crossing below the 20-day EMA, a sell signal is generated.

Supertrend Indicator with EMA-cross Filter

It is possible to code a trading system and discover the best combination of timeframe and signals. Further technical analysis and backtesting are always recommended.

The Supertrend indicator can also be used for multiple time-frames. Some traders recommend using the 15-minute time interval chart as the minimum, while it also works on a 15-second chart if the signals are generated automatically.

Supertrend Indicator: Conclusion

Supertrend indicator provides mostly accurate signals in trending markets. The Supertrend indicator is available for free on many trading platforms, which makes it more accessible.

The indicator helps traders make decisions faster. It is easy to use and easy to understand. However, the indicator is not suitable for all market conditions. It works best in trending markets regardless of whether it is weak or healthy trends to trigger buy and sell signals. The Super Trend indicator can be used on the stock exchange, forex, futures contracts market, and any given time frame.

However, Super Trend should be used in conjunction with other indicators such as EMA, RSI, MACD, etc. Backtesting is required to discover if this trading indicator is helpful in your chosen assets and trading methodologies.

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Updated: November 15, 2020

About the author: Alexander is the founder of daytradingz.com and has 20 years of experience in the financial markets. He aims to make trading and investing easy to understand for everybody, and has been quoted on Benzinga, Business Insider and GOBankingRates.