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Supertrend Indicator: How to calculate and use it?

2021-09-10 02:40:32

Charts always have a story to tell. To interpret them, we need indicators that can translate that story into simple, easy-to-read signals that help traders determine when to buy or sell cryptocurrency. Supertrend is one such indicator, which can help predict market movements.


What is the Supertrend Indicator?

Developed by Olivier Seban, Supertrend is a trend trading indicator that works similar to moving averages. It is plotted on an asset’s price chart and helps identify trends based on its placement vis-a-vis price. While the green line indicates a bullish trend, the red line represents a bearish trend. Here is an example of Supertrend indicator:


Chart Source: netpicks

How to Use the Supertrend Indicator?

This indicator is often used to trade cryptocurrencies, equities, and forex. It can evaluate hourly, daily, or monthly charts, but doesn’t work well in a sideways market. The Supertrend also acts as a strong resistance and support while providing a trailing stop-loss for trades.

The Supertrend relies on two primary parameters – period and multiplier. But, before getting into these parameters, we must understand an important term: Average True Range

What is ATR?

ATR helps traders measure an asset’s volatility. A volatility formula based on the low-high range is unable to capture volatility from gaps, which is where ATR comes in. It helps catch the “missing” volatility. Note that it doesn’t indicate any price direction, only volatility.

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What is Period and Multiplier in Supertrend?

A “period” is referred to as the Average True Range (ATR) number of days. By default, it is set to 7, meaning the ATR value will get calculated for the last 7 days.

The multiplier is a value by which the ATR gets multiplied, and is crucial when calculating supertrend. Its default value is 3. In that case, regardless of what the ATR value is, it will be multiplied by 3.

How is the Supertrend Indicator Calculated?

The ATR concept further introduces ATR bands in order to plot a zone around the asset price. This helps to evaluate if the value of the underlying asset is not following any pattern or is moving in a specific direction. The ATR is used to calculate the lower and upper bands as follows:

Supertrend Upper line (Red Line) = (HIGH + LOW) / 2 + Multiplier * ATR

Supertrend Down Line (Green Line) = (HIGH + LOW) / 2 – Multiplier * ATR

How to Use Supertrend for Intraday?

To use the Supertrend indicator, open a price chart and set 10-min intervals for intraday trading.

How to Use Supertrend for Intraday

Chart Source:

So, when you open up the chart and apply the Supertrend indicator, you will see that it consists of a line that flips from one side of the candlesticks to the other. Green and red lines are formed so you can start tracking for signals in your favor. Remember, green lines act as trailing stop loss for the long position and red lines represent trailing stop loss for the short position.

Find Buy/Sell Signal with the Supertrend Indicator

A buy signal is generated when the price of an asset becomes greater than the indicator or when the color of the line changes from red to green. On the other hand, when the green color changes to red or the asset price turns less than the indicator value, it is time to sell.

The Supertrend doesn’t predict any directions. Instead, it helps traders initiate a position once the direction is identified and can be referred to when determining whether to stay in the position while the trend continues.

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Final Words

A strong benefit of the Supertrend is that if a trader can determine one has definitely formed, it might last weeks, months, or even years. Like all indicators, if Supertrend can help book a handful of profits, it can also make traders sit through extreme pullbacks. Therefore, risk management is paramount and you should trade wisely and invest only what you can afford to lose.

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