Supertrend Indicator: What Is It and How It Works?

The Supertrend indicator is a technical analysis tool traders use to determine market trends and identify clear buy and sell signals.

Let’s explore how to use this indicator and incorporate it into your trading strategies.

Key Takeaways

• The Supertrend indicator helps traders identify market trends and generate buy and sell signals, making trading decisions simpler.

• It is particularly effective in trending markets and can be combined with other technical analysis tools for better accuracy.

• Adjusting the ATR period and multiplier settings allows traders to customize the indicator to suit different market conditions and trading styles.

What Is the Supertrend Indicator?

The Supertrend indicator is a straightforward trading tool that helps identify market trends and provide clear buy and sell signals.

This indicator is plotted on price charts and works well in trending markets, making it easier for traders to see whether the market is in an uptrend or downtrend.

Its simplicity and effectiveness make it a favorite among traders.

Why Is the Supertrend Indicator Important?

The Supertrend indicator is important because it simplifies trading decisions by clearly showing the direction of the market trend.

When you're trading, it can be tough to determine if the market is going up or down. The Supertrend indicator takes the guesswork out of this by providing clear buy and sell signals.

This helps you make more informed decisions and reduces the chances of making mistakes based on emotions.

How Does a Super-trend Indicator Work?

The Supertrend indicator works by using the average true range (ATR) to calculate its value.

When the price moves across the ATR value, it changes direction, switching from a downtrend to an uptrend and vice versa.

This change is visually represented on the chart, making it easy to follow the trend.

Calculating the Supertrend Indicator

Calculating the Supertrend indicator involves a few straightforward steps. Here’s a simple breakdown:

1. Calculate the Average True Range (ATR):

First, determine the ATR, which measures market volatility. The ATR is usually calculated over a specific period, like 10 or 14 days.

2. Determine the Basic Bands:

Next, determine the basic bands (upper band and lower band) of the Supertrend indicator that help identify the market trends.

You can calculate the upper band and lower band using the below formulas:

The “High” and “Low” refer to the highest and lowest prices of the period.

3. Plot the Supertrend Line

After calculation, you can determine the market trend based on the below:

• Uptrend: When the price crosses above the upper band, the Supertrend line moves below the price and turns green, indicating a potential uptrend.

• Downtrend: When the price crosses below the lower band, the Supertrend line moves above the price and turns red, indicating a potential downtrend.

Supertrend Indicator Parameters

To effectively use the Supertrend indicator, it's essential to understand its key parameters.

These parameters allow you to customize the indicator to suit different trading styles and market conditions.

1. Average True Range (ATR) Period

The ATR period determines the number of periods used to calculate the Average True Range, which measures market volatility.

The ATR is a key component of the Supertrend indicator as it helps adjust the sensitivity based on how volatile the market is.

• Common Setting: 10 or 14 periods.

• Effect: A shorter ATR period makes the indicator more sensitive to price changes, while a longer period makes it less sensitive and smoother.

2. Multiplier

The multiplier sets the distance of the Supertrend bands from the mid-point of the price range. This parameter determines how closely the bands follow the price action.

• Common Setting: 3.

• Effect: A higher multiplier results in a wider band, making the indicator less likely to give false signals during minor price fluctuations.
  A lower multiplier tightens the band, making the indicator more responsive but possibly generating more false signals.

3. Adjusting Parameters

• For Higher Sensitivity: Use a shorter ATR period and a lower multiplier. This setup makes the Supertrend indicator more responsive to price changes, and suitable for shorter-term trading.

• For Lower Sensitivity: Use a longer ATR period and a higher multiplier. This setup smooths out the indicator, making it more suitable for longer-term trading and reducing the chances of false signals.

Best Supertrend Indicator Settings

The best settings for the Supertrend indicator vary depending on the market and trading style. However, a common and effective setting is an ATR period of 10 and a multiplier of 3.

Adjusting these settings can help tailor the indicator to suit different market conditions.

Below is a breakdown of the most common settings so you can pick the best supertrend indicator settings for you:

• Default Settings: ATR period of 10 and a multiplier of 3. This setup balances sensitivity and reliability, making it a good starting point for most traders.

• Aggressive Settings: ATR period of 7 and a multiplier of 2. This setup is more sensitive and better suited for short-term traders looking for quick market movements.

• Conservative Settings: ATR period of 14 and a multiplier of 4. This setup is less sensitive and better suited for long-term traders who want to avoid minor price fluctuations.

Interpreting the SuperTrend Indicator

The Supertrend indicator is straightforward to interpret. As mentioned above, when the price is above the indicator, it signals an uptrend; when the price is below, it indicates a downtrend.

Moreover, the Supertrend indicator is designed to simplify trading decisions by providing clear buy and sell signals.

Supertrend Indicator Buy Signal

A buy signal is generated when the price crosses above the Supertrend line, indicating the start of an uptrend.

• This crossover is visually represented by the Supertrend line moving below the price and usually turning green.

• When traders see this signal, it’s a cue to consider entering a long position, betting that the price will continue to rise.

Supertrend Indicator Sell Signal

On the other hand, a sell signal is generated when the price crosses below the Supertrend line, indicating the beginning of a downtrend.

• In this case, the Supertrend line moves above the price and typically turns red.

• This signal suggests that traders should consider entering a short position or exiting a long position, anticipating that the price will continue to fall.

How to Use the Supertrend Indicator

Using the supertrend indicator is pretty straightforward and involves combining all the concepts we’ve explained above.

Here’s a quick recap in this step-by-step guide.

1. Add the Indicator to Your Chart: Most trading platforms allow you to add the Supertrend indicator to your price chart. Once added, you'll see a line that changes color based on the trend.

2. Set the Parameters: Choose the ATR period and multiplier that suit your trading style. Common settings are an ATR period of 10 and a multiplier of 3, but you can tweak these to fit your needs better.

3. Read the Trend: Look at the position of the price relative to the Supertrend line. If the price is above the line, the market is in an uptrend. If it's below, the market is in a downtrend.

4. Follow the Signals: Watch for crossovers. A buy signal occurs when the price crosses above the Supertrend line, turning it green. A sell signal happens when the price crosses below the line, turning it red.

An Example of Using the Supertrend Indicator

Let’s say you’re trading a stock and have added the Supertrend indicator to your price chart with an ATR period of 10 and a multiplier of 3.

• Initially, you observe that the price is above the Supertrend line, which is green, indicating an uptrend.

• After a few days, the price crosses below the Supertrend line, turning it red and generating a sell signal.

• Recognizing this as a sign of a potential downtrend, you decide to sell your position or go short.

You continue to monitor the market, and eventually, the price crosses back above the Supertrend line, turning it green again.

This crossover generates a buy signal, indicating a new uptrend. You then enter a long position, expecting the price to rise further.

Throughout the trade, you use the Supertrend line as a guide, placing your stop-loss orders just below the line to manage risk.

This example shows how the Supertrend indicator provides clear buy and sell signals, helping you make informed trading decisions and effectively manage your trades.

Popular Supertrend Indicator Strategies

Traders use the Supertrend indicator in different ways but here are some popular strategies incorporating the Supertrend indicator.

1. Trend Following Strategy

The first strategy is the basic go-to. This strategy focuses on following the primary market trend.

Traders use the Supertrend indicator to identify and follow the direction of the trend, entering trades in the direction of the trend and holding them until the trend reverses.

How it works:

• Enter a long position when the price crosses above the Supertrend line, indicating an uptrend.

• Exit the long position or enter a short position when the price crosses below the Supertrend line, indicating a downtrend.

2. Supertrend and Moving Averages

Combining the Supertrend indicator with moving averages provides additional confirmation of trend direction and helps filter out false signals.

How it works:

• Look for a buy signal from the Supertrend indicator (price crossing above the line) and ensure the price is also above the moving average.

• Look for a sell signal from the Supertrend indicator (price crossing below the line) and ensure the price is also below the moving average.

For example, when both the Supertrend indicator signals a buy and the price is above the 50-day moving average, you enter a long position.

This dual confirmation helps ensure the trend is strong.

3. Supertrend and RSI (Relative Strength Index)

The RSI helps identify overbought or oversold conditions, providing additional insights alongside the Supertrend indicator.

How it works:

• Look for a buy signal from the Supertrend indicator and ensure the RSI is below 30 (indicating an oversold condition).

• Look for a sell signal from the Supertrend indicator and ensure the RSI is above 70 (indicating an overbought condition).

For example, when the Supertrend indicator turns green, and the RSI is below 30, it suggests a strong buy opportunity due to the combination of trend confirmation and oversold conditions.

4. Supertrend with Support and Resistance Levels

Using the Supertrend indicator in conjunction with key support and resistance levels helps identify optimal entry and exit points.

• Look for a buy signal from the Supertrend indicator near a strong support level.

• Look for a sell signal from the Supertrend indicator near a strong resistance level.

For example, when the Supertrend indicator turns green, and the price is near a support level, you enter a long position.

You exit when the price reaches a resistance level, and the Supertrend indicator turns red.

Strengths and Limitations of the Supertrend Indicator

The supertrend indicator is beneficial but also presents a few limitations.

Strengths

The Supertrend indicator is a traders’ favorite for the below reasons:

• The Supertrend indicator is easy to understand and use, even for beginners. It provides clear visual cues for buy and sell signals.

• It is highly effective in trending markets, helping traders to identify and follow the prevailing market direction.

• The indicator can be applied to various timeframes, making it useful for different trading styles, from day trading to long-term investing.

Limitations

The Supertrend indicator has the following cons:

• In non-trending or choppy markets, the Supertrend indicator may generate false signals. These occur when the price repeatedly crosses above and below the indicator line without establishing a clear trend.

• As a trend-following indicator, it may lag behind the actual price movements. This means that traders might enter or exit trades slightly later than the optimal point.

• Market volatility can influence the indicator's effectiveness. While adjusting the ATR period and multiplier can help, it may still struggle in highly volatile or low-volatility environments.

Conclusion

Overall, the Supertrend indicator is an easy and straightforward technical analysis tool you can use to improve your trading strategies. Make sure to adjust the indicator’s settings based on your preferences.

By adjusting the ATR period and multiplier settings, you can better customize the indicator to suit different market conditions and trading styles. Combining the Supertrend indicator with other technical analysis tools can further enhance its accuracy and reliability.

Moreover, if you want to trade with premium conditions, join XS to gain access to advanced charting tools and insurance coverage,

FAQs

Which Supertrend Indicator is Best?

The best Supertrend indicator settings depend on the market and trading style. Common settings are an ATR period of 10 and a multiplier of 3.

Is the Supertrend Indicator Accurate?

The Supertrend indicator is generally accurate in trending markets but may produce false signals in sideways markets.

How Do You Use the Supertrend Indicator?

To use the Supertrend indicator, apply it to your chart and follow the buy and sell signals it generates.

What is 7 and 3 in Supertrend?

The numbers 7 and 3 in Supertrend refer to the ATR period and multiplier. An ATR period of 7 and a multiplier of 3 are settings that some traders use to adjust the indicator's sensitivity.

How to Avoid Supertrend False Signal?

To avoid false signals, combine the Supertrend indicator with other technical analysis tools, such as moving averages or the RSI, to confirm trends.