Last Updated on Aug 26, 2021 by Aradhana Gotur

If you are an intra-day trader, it is very important that you monitor and understand the patterns of market trends and create a trading strategy, complete with target prices and stop losses for each of your pickings. 

There are various indicators that form part of technical analysis that give out signals to the investors about the possible direction of price movement in the market. Of all the indicators for quick technical analysis, the Supertrend Indicator is one of the simplest that makes it much easier to rely on. Based on the strategy for a particular day, with the help of this indicator, you can locate precise signals to buy or sell.

This article covers:

What is the supertrend indicator?

It is a trend-following indicator. It is plotted in stock price charts for investors and highlights prominently visible trends that are shown in red when prices have dipped and green when prices have risen. 

This indicator works on only two parameters: period and multiplier. Traders usually use 10 periods – Average True Range number of days (ATR – yet another indicator that gives you market volatility value by decompressing the range of prices of a security for a particular time) – and three multipliers (A multiplier is a value by which ATR would be multiplied). ATR plays a crucial role in this indicator since it is used to compute a value, and based on that, the degree of price volatility can be tracked. If all of these are too complex, you don’t have to worry, systems and screeners are now equipped to do the math for you in seconds – simply select the options on your computer and set up your trade strategy!

Supertrend Indicator was created by Olivier Seban to work on different time frames. It works for futures, forex and equities. You can run it every 15 minutes or hourly or weekly or daily.

How to use supertrend indicator?

Here is the step by step guide on the method to use this indicator:

  1. Open the chart of the stock you are willing to trade.
  2. Fix the time interval of 10 minutes if you want to go for intra-day trading.
  3. Select supertrend as your indicator.
  4. You can set the parameter values to 10 and 3 or it is also possible to insert your own setting as well.
  5. Start observing when the signals are in your favour.
  6. You can also observe the arrows to rely on for the signal to buy or sell.

It is highly recommended to have your stop loss in place. While aiming for long positions, you can put your stop loss at the green light indicator, and similarly, for short positions, you can put your stop loss at the red light indicator.

What are the parameters for supertrend indicator?

The most popular values for the parameters are 10 and 3. There is no fixed setting for any trade indicator. Any changes in this value can affect the use of supertrend indicator. Also, the more settings you revise, it can lead to a trading system that is over-optimized for that point in time. 

Noteworthy points:

  1. Smaller settings shall make the indicator more reactive to the price, which could mean more signals.
  2. Higher settings shall remove noise from the market at the risk of less trading signals.

Supertrend indicator formula

The formula for supertrend indicator is as below:

Up = (high + low)/2 + multiplier X ATR
Down = (high + low)/2- multiplier X ATR

Calculation of Average True Range

[(Previous ATR) X 13 + Current ATR]/14

Here, 14 indicates a period. Therefore, ATR is derived by multiplying the previous ATR with the period less than one number. Add the latest TR and divide by the period.

Hence, ATR plays a crucial role in the construction of this indicator.

How to identify buy and sell signals using supertrend indicators?

Irrespective of whether the market is trending upward or downward, this indicator works equally well. When the trend closes below the price and the colour changes to green, a buy signal is generated. The opposite is when the trend closes above the price and the colour changes to red, generating a sell signal. 

No indicators elicit 100% accuracy, and it is the same with the supertrend indicator. It may also happen that false signals are generated, though the chances of that happening are meagre. That said, it always helps to use this indicator in combination with other indicators to get better trading signals. You can filter out the stocks and trade accordingly with the help of this signal.

Trading strategy using supertrend and moving average crossover

The moment when the supertrend turns green (meaning the supertrend is below the price) and 5 EMA (Exponential Moving Average) is above 20 EMA, a buy signal is generated. Similarly, a sell signal is generated when the trend turns red (meaning the supertrend is above the price) and 20 EMA is below 5 EMA, a sell signal is generated.

Best timeframe to use in supertrend indicator

Longer timeframes are generally used by Swing Traders and Position Holders because it helps to identify absolute trade signals after confirmation of trends, tiding over short-term volatility. The lowest time frame you can use is the 15-minute chart. You can also use this indicator on multiple timeframes where you can place it on a longer time frame and then go down to a shorter time frame and use it for entry and exit signals.

Pros and cons of supertrend indicator

This indicator is available free of cost on almost all trading platforms. The supertrend gives the most accurate signals on precisely timing the trades. With the help of the indicator, you as an intraday trader can make faster decisions. On the other side, the indicator works best only when the market is trending and not in all market phases.

Such a trend indicator needs to work with other indicators like RSI and Parabolic SAR. to receive filtered signals. Also, only two parameters are used to arrive at any conclusion, which may not be sufficient under certain market conditions. Apart from being not accurate for all situations, it also shows different results for different stocks.

Intraday traders can use this supertrend indicator to make their decisions quickly since it can provide the analysis for a particular stock within a few seconds. This indicator is similar to moving averages but it can be used on multiple timeframes to generate entry and exit signals. Combining the results generated by supertrend indicator and other such indicators shall increase the chances for the most accurate results.

Aradhana Gotur