Supertrend Explained with Strategy & Examples

The Supertrend Indicator was invented by Olivier Seban to indicate buy and sell signals. It shows the trend of the price in the market. It is a signal line that turns green or red depending on the trend. When the supertrend turns red, it signals to sell, and when it turns green, it signals to buy. Traders and analysts can use this technical indicator as per their needs and can apply it in any time frame such as 5 min, 10 min, 15 min, daily, weekly, etc.,

A buy signal is formed when the Supertrend crosses below a price and the colour changes to green. On the other hand, the sell signal is generated when the supertrend crosses above the price, and it turns red. The supertrend is based on two fundamental dynamic values, namely period and multiplier. It is common to use a multiplier of 10 and a value of 3, but it can be changed based on need.

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How to Use Supertrend

Depending on the trend, the supertrend provides buying and selling signals. It also indicates the market's uptrend and downtrend. Even if it is a simple and understandable indicator, it does not always provide accurate signals. As a result, many analysts prefer other indicators with supertrend, such as Moving Averages (MA), RSI, Average True Range (ATR), etc.,

Some traders make the mistake of buying quickly when the supertrend signals to buy or turns green, but this may not be the case every time, so investors should wait for the next candlestick to form to see if it will go up or down.

If the market is sideways, it may generate false signals.

When the price falls below the supertrend, it signals to sell, and when the market rises above the supertrend, it signals to buy, but as previously stated, we must wait for the next candle to form after crossing the supertrend.

The best way to understand and use this technical indicator is to first understand some terms like trend and its various types, as well as ATR (Average True Range), which is also a technical indicator.

The Supertrend indicator is based on ATR (Average True Range). As a result, two parameters influence the super trend:

• ATR Period
• ATR Multiplier

The ATR period and multiplier are set to 10 and 3 by default, as these values are commonly used and adequate for analysing while trading, but they can be changed as needed.

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For a better understanding of Supertrend, we must know about the ATR and Trends in the market:

• ATR (Average True Range) -

ATR is a technical indicator used in technical analysis to measure market volatility. It is derived from the 14-day Simple Moving Average (SMA). It was published by J. Welles Wilder Jr. in his book New Concepts in Technical Analysis Systems. It was originally invented for use in commodities markets but has since been applied to all types of securities. The ATR measures volatility only, not price direction.



• Types of Trends

1. Uptrend
An uptrend, also known as a rising trend, is the trader's favourite trend type. Stock prices move upward in this trend by making a series of higher highs and higher lows.Though it is safe to make a buy decision anywhere in an uptrend, it gives the best returns when bought near a pullback or intermittent lows.

2. Downtrend
The downtrend is also known as the falling trend. A downtrend is a series of lower highs and lower lows. A downtrend line is a descending line that can be drawn by connecting two or more high points that have lower highs. The downtrend line acts as resistance as long as the price remains below the trend line.
Each high in a downtrend signals a probable selling point. More points in the trendline indicate more validity and strength of the trend.

3. Sideways
Also known as a neutral trend. A sideways line is a horizontal line and can be drawn by connecting two or more equal lows. A sideways trend line acts as a support as long as the price remains above the trend line. Each low in an uptrend signals a probable buying point. More points in the trendline indicate more validity and strength of the trend.

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How to Calculate Supertrend

Pros of Supertrend

• The supertrend is a useful indicator in trending markets, where there are uptrends and downtrends in price.
• It is very easy to understand and also very effective.

Cons of Supertrend

• It may give false signals or may not be beneficial when the market movements are sideways. The supertrend is effective only when the market is trending.
• For a better signal, it is better to use a combination of other indicators.
• It is based on the ATR (Average True Range) indicator.

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Identifying Buy & Sell Signals by Supertrend

As we mentioned above, the supertrend helps to generate buy and sell signals. The supertrend represents both the downtrend and the uptrend. Understanding and identifying those signals is important for intraday traders. The crossing of the supertrend line signals a sell if it turns red, and a buy if it turns green. Check out the charts for a better understanding. With the Supertrend indicator, you can also track your stop loss and save your profits.

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