What is Supertrend indicator and how does it work?

supertrend indicator

In the dynamic realm of  trading, having the right tools at your disposal is paramount. One such potent ally for traders is the Supertrend indicator. In this in-depth guide, we will understand the intricacies of the Supertrend indicator, exploring its definition, functionality, and equipping you with strategies for effective intraday trading.

What is the Supertrend Indicator?

The Supertrend indicator, devised by Olivier Seban, is a trend-following tool akin to moving averages. It stands out for its simplicity, relying on just two parameters: period and multiplier. This guide aims to demystify its workings and empower you to harness its potential for profitable intraday trading.

How Does the Supertrend Indicator Work?

how to use supertrend indicator

At its core, the Supertrend leverages the Average True Range (ATR) to gauge price volatility. Default parameters are set at 10 for ATR and 3 for the multiplier. The formula involves calculating Up and Down values based on high, low, and ATR. The indicator's color changes to green in an uptrend and red in a downtrend, providing a visual cue for traders.

Supertrend Indicator Formula:

supertrend formula

The Supertrend indicator formula involves two key components:

Up = (high + low / 2 + multiplier x ATR)

Down = (high + low) / 2 – multiplier x ATR

Additionally, the Average True Range (ATR) is calculated as follows:

ATR = [(Prior ATR x 13) + Current True Range] / 14

Here, 14 represents the period. The ATR is derived by multiplying the previous ATR with 13, adding the latest True Range, and dividing the result by the period. This intricate formula underscores the pivotal role of ATR in Supertrend technical analysis.

Using the Supertrend Indicator: Step-by-Step Guide

To harness the power of the Supertrend indicator in intraday trading, follow these steps:

  1. Open the chart of the desired stock/crypto.
  2. Set a time interval of 15 minutes for intraday trading.
  3. Insert the Supertrend indicator with default settings (10, 3) or customize based on preference.
  4. Utilize the buy and sell signals indicated by color changes.
  5. Implement a stop-loss strategy to manage risks effectively.

Parameters and Strategies

Understanding the impact of parameter adjustments is crucial. While default settings (10, 3) are widely used, altering them can affect the indicator's responsiveness. Traders should strike a balance, considering that smaller settings increase reactivity, while higher settings reduce noise.

Supertrend and Moving Average Crossover:

Combine Supertrend with a 5-20 EMA crossover for optimal intraday trading signals. Buy when Supertrend is green, and 5 EMA is above 20 EMA; sell when Supertrend is red, and 20 EMA is above 5 EMA.

Pros and Cons of Supertrend Indicator

Pros:

  • Accurate signals at precise times.
  • User-friendly and freely available on various trading platforms.
  • Ideal for fast decision-making in trending markets.

Cons:

  • Less effective in sideways markets.
  • Works best in trending conditions.
  • Should be used in conjunction with other indicators for filtered signals.

While the Supertrend indicator isn't a magic bullet, mastering its formula and functionalities can significantly bolster your intraday trading endeavors. Integrating it into a holistic toolkit, along with complementary indicators, ensures a robust approach in navigating the complexities of the intraday market landscape.

Frequently Asked questions

Is the Supertrend indicator accurate?
While no indicator guarantees 100% accuracy, the Supertrend provides accurate signals in trending markets. It excels in identifying precise entry and exit points during strong price movements.

What does Supertrend 7 3 mean?
The numbers 7 and 3 refer to the default parameters: 7 for the period and 3 for the multiplier. These values determine the sensitivity and responsiveness of the indicator.

How do you calculate the Supertrend?
The Supertrend formula involves using the Average True Range (ATR) to calculate Up and Down values. The ATR itself is derived from prior ATR values, the current True Range, and a divisor (14).

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