Last Updated on Dec 6, 2022 by Anjali Chourasiya
As an intra-day trader, it is important to monitor and understand the patterns of market trends in order to create a trading strategy. There are various indicators that traders and investors can use to find out the possible direction of price movement in the market. Of all the indicators for quick technical analysis, the Supertrend indicator is considered to be one of the simplest and easiest to rely on for buy or sell signals.
In this article, let’s discuss the Supertrend indicator, its uses, parameters, formula, and more.
Table of Contents
What is the Supertrend indicator?
It is a trend-following indicator. The 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, hourly, weekly, or daily.
Supertrend indicator 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:
- Periods: 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).
- Multiplier: A multiplier is a value by which ATR would be multiplied. Three multipliers are used.
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!
How to use the Supertrend indicator?
Here is the step-by-step guide on the method to use this indicator:
- Open the chart of the stock you want to trade.
- Fix the time interval of 10 minutes if you want to go for intra-day trading.
- Select Supertrend as your indicator.
- You can set the parameter values to the default values, which are 10 and 3. You can set values as per your requirement as well. For instance, if you reduce the value to 5 and 1.5, the buy and sell signals will also increase.
- Start observing when the signals are in your favour.
- 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 the Supertrend indicator?
There is no fixed setting for any trade indicator. The most popular values for the parameters for the Supertrend indicator are 10 and 3. Any changes in this value can affect the use of the Supertrend indicator. Also, the more settings you revise, it can lead to a trading system that is over-optimized for that point in time.
- Smaller settings shall make the indicator more reactive to the price, which could mean more signals.
- Higher settings shall remove noise from the market at the risk of less trading signals.
Supertrend indicator formula
The formula for the 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 the Supertrend indicator?
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.
On a closing note
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 can be used on multiple timeframes to generate entry and exit signals. Combining the results generated by the Supertrend indicator and other such indicators shall increase the chances for the most accurate results.
How accurate is the Supertrend strategy?
Like all technical indicators, Supertrend cannot be 100% accurate. It can generate false signals in the sideways market.
Who invented the Supertrend indicator?
Olivier Seban is the inventor of the Supertrend indicator. It is created to help traders correctly identify buy and sell signals and the degree of price volatility.
What timeframe and setting are best for a Supertrend indicator for day trading?
The most popular values for the parameters for the Supertrend indicator are 10 and 3. Any changes in this value can affect the use of the Supertrend indicator.