Irrespective of the financial market you trade, it is crucial to make lucrative trading decisions. Likewise, the use of trading indicators for an intraday trader is simply unavoidable. However, it is well said that success requires more than a decent trading platform. While indicators aid in reading a trading chart and determining market ranges or trends, they help clients detect overbought, oversold, and reversal situations. In this piece, we discuss the Supertrend indicator in detail.
What Is Supertrend Indicator?
Founded by Olivier Seban, the Supertrend indicator produces precise buying or selling signals in a trending market. Plotted on price shows the current trend employing only two parameters: period and multiplier. Traders often consider it the same as other trend-following indicators, such as moving averages and MACD. However, it works much better across all time frames, including 1-Min, 5-Min, or 15 Min charts.
The Supertrend indicator strategy’s default parameters are 10 for ATR and 3 for its multiplier. In addition, the Average True Range (ATR) helps calculate the indicator’s value and signifies the extent of price volatility.
Changes to these data may impact the usage of the Supertrend indicator. Please note that no trading indicator has an optimal setting. Changing too many settings might result in a trading system that is over-optimized for the moment. Therefore, the less you change the settings for the indicator, the more productivity you can expect from it. Although more settings may reduce market noise, they can also reduce the reliability of the trading signals.
How does the Supertrend indicator work?
Like a Moving Average (MA), the Supertrend indicator is a trend-tracking overlay on a trading chart. Not to mention, it performs well in trending markets but can be misleading in range markets. Since the indicator employs the ATR to calculate volatility in the market, a trader should develop a strong understanding of the ATR first.
ATR is another indicator that measures market volatility by decompressing a security’s price range across time.
A true-range indication is the highest of these values: (current high – current low), (current high – previous close), and (current low – previous close).
To obtain the ATR, find the TR values for the series first, and divide them by the number of periods represented by n. Hence you get the actual range moving average.
So, we get the following equation by putting the abovementioned data into the ATR calculation.
TR=Max [(current high–current low), Abs(current high–previous close), Abs(current low–previous close)]
Where ATR=(1/n)
TRi = True Range
n = trading days count
This formula helps comprehend the indicator’s working procedure. First, ensure the super-trend indicator is configured correctly. Set Periods (ATR days) and adjust the multiplier accordingly. A multiplier is a number that increases ATR. Traders often employ ten for periods and a three for the multiplier. Prices adjustments are more responsive to shorter n values. Notably, there will be fewer signals to act upon if n is larger.
How to Setup the Supertrend indicator?
After installing it on your trading platform, you need to follow the simple steps listed below to set up the indicator.
Step 1: To trade a stock, open its chart.
Step 2: Set an intraday trading period of 10 minutes. Any standard charting software would work fine.
Step 3: Make your indication the super trend. You can set the figures to either 10 & 3 or use your custom configuration.
Step 4: Now start tracking favourable indications.
Step 5: You may also use the arrows to purchase and sell stocks.
How to trade using the Supertrend indicator?
The Supertrend indicator helps you perform solid technical analysis on any stock. You can also have confirmation of trend and decide whether to go long or short using this indicator. Since it works best in a trending market, determining an up or downtrend in any market shouldn’t be difficult.
However, do not forget to employ the stop-loss feature while opening a position based on the Supertrend indicator. Using the indicator line for a stop-loss would be even better. Moreover, you can trail it irrespective of the price direction. If you want to go long, place your stop loss at the green signal line. In another scenario, put it on the red line.
The indicator’s primary purpose is to produce traders’ buy and sell signals. It exhibits changing patterns via flipping. When the stock price exceeds the indicator value, the indicator turns green and signals a buy. Similarly, a sell signal is received when the price falls below the indicated value, leading the colour to turn red. The indicator catches intraday patterns fast. While using it, keep the default settings of 10 and 3. Trying to lower the settings may result in false indications.
Undoubtedly, using the Supertrend indicator combined with your stop loss pattern is the most fantastic strategy to make money effectively.
Things To Consider While Trading With Supertrend Indicator
You may utilize this indicator on different time frames for entry and exit signals. i.e. starting with a larger timeframe and working your way down to lower time frames. Swing and position traders might employ more extended periods. However, the 15-minute should be the smallest period for using the Super trend indicator.
Pros and Cons of Supertrend Indicator
Like all other indicators, the Supertrend indicator also has some pros and cons of using it. Let us quickly enlist a few of them below.
Pros
- The Supertrend indicator is well-known for producing accurate signals with default settings. Hence it appears to be one of the most reliable indicators.
- It produces precise signals, enabling traders to make appropriate trading decisions fast.
- The indicator is quick to set up, easy to understand, and simple to use.
- Supertrend indicator is widely available across multiple platforms. Mostly, traders can download it for free.
- It helps clients to perform quick technical analyses to find profitable trading opportunities.
Cons
- The Supertrend works well in a trending market but can be ineffective in a range market. That means it doesn’t necessarily work every time.
- The indicator employs only two parameters, including multiplier and ATR, which might not be sufficient in different trading conditions for predicting the market direction reliably.
Conclusion
The super-trend indicator works best in markets with unambiguous price patterns. In sideways markets, it may cause misleading signals, inciting erroneous trades. It is used with other indicators like moving averages and MACD for more efficient signals. Aside from the Supertrend indicator, no technical analysis tool works perfectly. Nevertheless, you may make wise selections and benefit handsomely. False signals occur from time to time using the Supertrend but are less often than produced by other indicators. Hence, using it in combination with other indicators is recommended.
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