What is the Supertrend Indicator?
A Supertrend is a trend following indicator which is similar to moving averages. It is plotted on price, and its placement can define the current direction. This indicator is simple to use and is constructed with the help of two parameters, which are period and multiplier.
The default parameters to construct the Supertrend indicator strategy are 10 for Average True Range (ATR) and 3 for its multiplier.
The average true range (ATR) plays a crucial role in ‘Supertrend’ as it uses ATR to calculate its value, and it signals the level of price volatility. It works for equities, forex, and futures and is used in 15 minutes, hourly, and daily charts.
How to use the Supertrend Indicator?
To use the Supertrend indicator, you need to open the chart of the particular stock you want to track and set the time interval. You need to search and apply the super trend as your indicator and keep the settings as 10 and 3(10 is period and 3 is multiplier) . Once you plot the indicator, you can follow the arrows for the signs to buy and sell the stocks.
Supertrend Indicator formula?
The super trend indicator is an excellent tool to understand the current market trends. It represents the downtrends and uptrends of a particular stock. The formula used in the super trend indicator is
For Uptrend it is
(high + low) / 2 + multiplier x ATR
For Downtrend it is
(high + low) / 2 – multiplier x ATR
Calculation of Average True Range
[(previous ATR x 13) + Current TR] / 14
Here, 14 indicates a period. Hence, the ATR is derived by multiplying the previous ATR with 13. Add the latest TR and divide it by period.
How to identify Buy and Sell signals?
The most important point for the intraday traders is to identify the buying and selling signals using the Supertrend indicator. Here, the Green color indicates a buy signal, and the red color indicates a sell signal. Lets see when a buy signal is generated and a sell signal is generated
Usually when you plot any Chart with Supertrend Indicator , The supertrend signal will be either buy or sell. When the Supertrend signal is ‘SELL’ , there will be a red line above the price line. Supertrend generates a buy signal when price crosses above this red line. When the super trend generates a buy signal, you can see the red line is moving downwards and now becomes a green line which is below the price . Usually there will be a green arrow marked at the candle where the Supertrend buy signal is generated. When you get buy signal , Stock can be bought with stop loss as low as the previous candle , as shown in image below.
Here comes a question: what if the previous candle low is very far, like 5% or 10% from buy signal level? Well in such cases we need to avoid supertrend signals. Only if previous candle is in range of 1-2% makes sense to buy as Stop loss should be reasonable
When the super trend generates a sell signal, the price of the stock crosses the super trend line(green) downwards.After the cross, the super trend line becomes red and the supertrend line goes above the price line . You should put your stop loss at the high of the previous candle, as shown in the image below.
Same rule of 1-2% stop loss range applies here as well. If previous candle high is 5%-10% high then avoid.
Advantages of Supertrend indicator?
Here are the advantages of the Supertrend indicator
- The super trend indicator gives signals to the precise time.
- The super trend indicator is available on various platforms free of cost.
- It offers the quickest and simplest technical analysis to intraday traders.
- It’s easy for intraday traders to make decisions faster.
- It is easy to use and understand.
Disadvantages of Supertrend indicator?
Here are the disadvantages of super trend indicator
- The Super Trend indicator is not suitable for all situations. For example, in sideways markets , supertrend will hit many times stop losses!
- The Supertrend uses only the two parameters of ATR and Multiplier, and they are not sufficient under some circumstances to predict the accurate direction of the market.
How to make the SuperTrend signal More accurate?
We can couple it with other indicators to see if the stock is trending and overbought or oversold.
We can use RSI and ADX indicators to complement the signal given by the Supertrend indicator.
Adx measures strength of trend , and ADX > 30 indicates strong trend.
Similarly RSI measures Overbought and Oversold. RSI > 80 is overbought and RSI < 20 is oversold.
Example is supertrend generates Sell signal, and ADX is > 30 and stock is not oversold , it means its a good sell
How to get Realtime Supertrend Breakouts and breakdowns
You can get realtime supertrend breakouts and breakdowns using Intradayscreener.com .
It has a built in real time scanner which list down all stocks having positive or negative supertrend signal on 5 minute and 15 minute charts. You can access the supertrend scanner here