Ever wondered what is a Supertrend Indicator in stock markets? For a start, trading in stock markets is like navigating through murky waters where the key to success is to identify prevailing trends or possible trend reversals. There are many indicators that help traders in identifying trends. A supertrend indicator is one of the many such indicators that is used commonly by traders across the globe. Want to know more about this indicator? Then you have come to the right place. Check out this blog to learn the meaning of supertrend indicator and how to use it effectively to create a successful trading portfolio.
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What is a Supertrend Indicator?
The Supertrend Indicator, developed by Oliver Seban, serves as a reliable tool for traders seeking insights into the prevailing trends in various financial markets, such as futures, forex, and equities. Similar to moving averages, this trend-following indicator is plotted directly on price charts, simplifying trend identification.
This versatile tool can be applied across various timeframes, ranging from short-term 15-minute charts to longer-term weekly and daily charts. The Supertrend Indicator’s fundamental construction involves just two user-defined parameters, namely, the ‘period’ and the ‘multiplier.’ These parameters play a pivotal role in shaping the indicator’s behavior. The ‘period’ refers to the number of days considered for the Average True Range (ATR), while the ‘multiplier’ is the factor by which the ATR value is multiplied. These parameters enable traders to customize the indicator to suit their specific trading preferences and risk tolerance.
What is the Supertrend Indicator Formula?
The way to calculate the supertrend indicator includes the use of ATR and a multiplier. Traders usually use the default settings for calculating the supertrend indicator of ATR (Average True Range) value of 10 and a multiplier set at 3. All you need to do is select it and choose your preferred timeframe for trading. The ATR value and multiplier can be adjusted according to individual trading preferences.
The Supertrend indicator comprises two lines,
- A red line for bearish trends
- A green line for bullish ones.
Two distinct formulas are employed for these lines, as detailed below:
Supertrend Indicator Formula for Bearish Trends (Red Line):- (High + Low) / 2 + (multiplier x ATR)
Supertrend Indicator Formula for Bullish Trends (Green Line):- (High + Low) / 2 – (multiplier x ATR)
What is Supertrend 7 3?
A. Supertrend 7,3 is a specific configuration of the Supertrend indicator, where the settings are typically a period of 7 for the Average True Range (ATR) and a multiplier of 3. These settings are used to calculate the Supertrend line, which can help traders identify potential trend changes or set stop-loss levels based on the given parameters.
How to Use Supertrend Indicator?
The supertrend indicator primarily helps in identifying the trend or the direction of the price movement. Traders can use the supertrend indicator to shape their portfolios. This indicator can be used by traders in the following manner.
The primary function of the Supertrend Indicator is to identify the direction of the current trend. It does this by plotting two lines on the price chart: a red line for bearish trends (indicating a potential downward movement) and a green line for bullish trends (indicating a potential upward movement). This information is crucial for traders as it helps them align their positions with the prevailing market sentiment.
Identifying entry and exit points
Traders rely on the Supertrend Indicator for generating entry signals. Crossing above the green Supertrend line suggests a potential bullish trend, indicating a potential long (buy) entry. Conversely, crossing below the red Supertrend line signifies a potential bearish trend, indicating a potential short (sell) entry. These signals are particularly valuable for traders seeking precise entry points.
Additionally, the Supertrend Indicator can provide exit signals. In a long position (buy), if the price crosses below the green Supertrend line, it may signify the end of the bullish trend, suggesting a potential exit point. Similarly, in a short position (sell), if the price crosses above the red Supertrend line, it may indicate a potential exit as the bearish trend weakens. These exit signals aid traders in making timely decisions to maximize their trading strategies.
Adaptable to changing market conditions
The Supertrend Indicator incorporates the Average True Range (ATR) in its calculations. This means it adjusts its levels based on market volatility. During periods of high volatility, the Supertrend lines will be wider apart, and during low volatility, they will be closer together. This feature makes it adaptable to changing market conditions.
Strength of the trend
By observing the distance between the Supertrend lines and the price, traders can gauge the strength of the current trend. Wider separation between the lines typically indicates a strong trend, while narrowing separation suggests a weakening trend. This can help traders make decisions about holding or exiting positions.
Using stop loss
The Supertrend Indicator can assist traders in setting appropriate stop-loss levels. For long positions, the stop-loss can be placed just below the green Supertrend line, and for short positions, just above the red Supertrend line. This way, traders can limit potential losses if the market moves against them.
What are popular Supertrend Indicator strategies?
Some of the popular supertrend trading strategies commonly used by traders are explained hereunder.
Supertrend with Moving Averages
Combining the Supertrend Indicator with moving averages is a common strategy. Traders use a simple or exponential moving average (e.g., 50-period or 200-period) along with the Supertrend.
- When the Supertrend is in an uptrend (price above the Supertrend) and the price is above the moving average, it can be considered a stronger buy signal.
- Conversely, when the Supertrend is in a downtrend (price below the Supertrend) and the price is below the moving average, it can be a stronger sell signal.
Supertrend Crossover Strategy
The Supertrend Crossover Strategy combines two Supertrend indicators with different settings to identify potential trend reversals and trade signals. Traders typically use two Supertrend indicators with varying parameters, such as one with a shorter period (e.g., 7) and another with a longer period (e.g., 14).
- When the short-term Supertrend crosses above the long-term Supertrend, it generates a bullish crossover signal, indicating a potential uptrend.
- Conversely, when the short-term Supertrend crosses below the long-term Supertrend, it generates a bearish crossover signal, indicating a potential downtrend.
Supertrend with support and resistance
The Supertrend with Support and Resistance strategy combines the Supertrend Indicator with key support and resistance levels to identify entry and exit points more precisely.
Traders begin by identifying significant support and resistance levels on their price charts, often using historical price data or tools like pivot points.
- When the Supertrend is in an uptrend and the price approaches a strong support level, it can be a potential buy opportunity.
- Conversely, when the Supertrend is in a downtrend and the price nears a significant resistance level, it may be a potential sell opportunity.
Supertrend indicator is one of the easiest technical analysis tools which therefore makes it quite popular among novice or seasoned traders. The use of this indicator to not only identify the trends but also potential trend reversals as well as entry and exit points are instrumental in creating a healthy trading portfolio.