How to Use Supertrend Indicator?

Trading in the crypto market requires a deep understanding of market trends, technical analysis, and the use of effective tools. With the advancement in technology, traders can now use numerous indicators to stay ahead in the game. The Supertrend Indicator is a powerful tool that is widely used by traders for technical analysis. It is a simple yet effective indicator that can help you make informed trading decisions by providing a clear signal of the underlying trend. In this comprehensive guide, we will explore the basics of the Supertrend Indicator, its underlying calculations, and how to use it effectively in your trading strategy.

Introduction to Supertrend Indicator

The Supertrend Indicator was created by Olivier Seban and is used for intraday trading in different time frames, including futures, forex, and equities. This indicator is similar to the Moving Average Convergence Divergence (MACD) and is used in 15-minute, hourly, weekly, and daily charts. The Supertrend Indicator is a trend-following indicator that combines aspects of both moving averages and trend indicators. It is calculated based on the average price and the volatility of the market. The indicator is displayed as a line on the chart and can change from green to red, indicating a change in the underlying trend.

The Supertrend Indicator generates buy and sell signals by taking into account the current market trend and the volatility of the market. If the indicator line is green (blue in the figure), it indicates a bullish trend and a buy signal, while a red line indicates a bearish trend and a sell signal.

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Calculating the Supertrend Indicator

The calculation of the Supertrend Indicator involves three key parameters: the average price, the volatility of the market, and the multiplier. The average price is typically calculated as the average of the high and low prices, while the volatility of the market is calculated based on the average true range.

Once these two parameters have been calculated, the multiplier is used to calculate the final value of the Supertrend Indicator. The multiplier is a value that adjusts the sensitivity of the indicator and can be adjusted to suit the trader’s needs.

Step 1: Calculating the Average True Range (ATR)

The true range of a bar is determined by taking the maximum of the following three values:

• Current high minus current low
• Current high minus previous close
• Current low minus previous close

To obtain the ATR, a 10-period rolling average is applied to the true range using the following formula:

Step 2: Initial Upper and Lower Bands

The upper and lower bands are determined by using a multiple of the ATR, with a default multiplier of 3, and are offset from the average price:

Step 3: Final Upper and Lower Bands

As shown in the figure above, the bands always move in the same direction, meaning that when the band is below prices, it only moves upwards or sideways, but never downwards.

The final lower band value is the larger of the current and previous initial lower band values. If the previous initial value is larger, the band remains unchanged.

Similarly, the final upper band value is the smaller of the current and previous initial upper band values. If the previous initial value is smaller, the band remains unchanged.

Step 4: Plotting the Supertrend Indicator Band

The final upper and lower bands are used to plot the Supertrend indicator band on the chart. If prices have closed above the final upper band, an uptrend is signaled and the final lower band is plotted. If prices have closed below the final lower band, a downtrend is signaled and the final upper band is plotted.

How to Use the Supertrend Indicator in Trading?

The Supertrend Indicator is a powerful tool that can be used to trade a variety of financial instruments, including stocks, forex, and commodities. It is a versatile indicator that can be used in both short-term and long-term trading strategies.

One of the key benefits of the Supertrend Indicator is that it provides clear signals of the underlying trend. This makes it easier for traders to make informed decisions, as they can quickly determine the direction of the trend and adjust their trading strategy accordingly.

The Supertrend Indicator can also be used in conjunction with other technical indicators and chart patterns for a more comprehensive analysis of the market. For example, traders may use the Supertrend Indicator in combination with support and resistance levels, moving averages, and candlestick patterns.

Supertrend Indicator Strategies

Combining Supertrend and Other Indicators

Traders often use the Supertrend indicator as a tool to identify buy and sell signals. The simplest way to do this is to plot the signals on a chart and observe the entry and exit indicators based on the color switch. However, the accuracy of these signals can be improved by combining Supertrend with other overlays. In this section, we will discuss some reliable strategies to identify buy and sell signals by using the Supertrend indicator in combination with other indicators.

Supertrend and Relative Strength Index (RSI) Indicator

One reliable strategy is to combine the Supertrend indicator with the RSI indicator to determine the entry and exit points for trades. By using the RSI, which has a default period of 14, traders can determine whether the potential trade is overbought or oversold, and can measure the momentum of the market. An RSI value below 30 usually indicates that the market is oversold, and a value above 70 indicates that the market is overbought. When the price crosses above 30, it is typically considered a buy signal, while a cross below 70 generates a sell signal. Traders should use the RSI to confirm the Supertrend indicator. If both indicate that the market is trending, traders can assume that the signals are reliable.

Supertrend and MACD

Another strategy is to combine the Supertrend indicator with the MACD indicator to measure trend strength. The MACD works best in a trending market, just like the Supertrend indicator. In an uptrend, the MACD line crosses above the zero line, indicating a buy signal, while in a downtrend, the MACD line crosses below the signal, indicating a sell signal. The recommended day trading parameters for the MACD indicator are 26-13-9 on a 10-minute chart, although this can vary based on the period observed.

Traders can observe convergence as the histogram gets smaller when the moving averages approach each other’s value, and divergence is signaled as the histogram gets bigger. If the faster-moving average crosses under the slower-moving average, a new downtrend is indicated, and conversely, a new uptrend is indicated when the slower-moving average crosses above the faster-moving average. Traders can confirm their entry and exit points by comparing the color of their Supertrend line with the trend reflected by the MACD.

Supertrend and Moving Averages

Moving averages are often used to smooth out price data and reduce noise on a chart, making it easier to identify trends. By combining a moving average with the Supertrend indicator, traders can use it as a confirmation tool to confirm their entry or exit signals. When using a moving average, the price is averaged over a certain period, with the most common periods being 50, 100, and 200. By comparing the signals generated by the Supertrend and moving average indicators, traders can make more informed decisions about when to enter or exit trades.

Benefits of Supertrend Indicator

The main objective of the Supertrend Indicator is to provide buy and sell signals to traders. It shows the change in trends by turning its color. When the stock price is higher than the indicator value, the indicator gives a buy signal by turning green. On the other hand, when the price is lower than the indicator value, a sell signal is generated, and the color changes to red. This indicator captures short intraday trends accurately and quickly. The default values of 10 and 3 are considered the best for use.

One of the biggest advantages of the Supertrend Indicator is that it sends out accurate signals at the right time. It is available on various trading platforms for free and offers the quickest technical analysis for intraday traders. Moreover, it can be used in combination with other indicators such as MACD and RSI for better results.

Conclusion

The Supertrend Indicator is a simple yet effective tool that can help traders make informed decisions by providing clear signals of the underlying trend. By combining aspects of both moving averages and trend indicators, the Supertrend Indicator offers a unique perspective on market trends and provides valuable information for traders. Whether you are a beginner or an experienced trader, the Supertrend Indicator can be a valuable addition to your trading toolkit.

As a final thought, by understanding the basics of the Supertrend Indicator, its underlying calculations, and how to use it effectively in your trading strategy, you can take your trading to the next level and achieve better results.