What Is A Supertrend Indicator?
A Supertrend Indicator is a trend-following technical indicator that is used to identify market trends and potential entry and exit points in trading. It is quite popular among all types of traders because this indicator can be used when trading all types of assets, including stocks, currencies, cryptocurrencies, and commodities.
A Supertrend Indicator is based on two dynamic values, period and multiplier, and incorporates the concept of Average True Range (ATR) to measure market volatility. The Supertrend Indicator derives both buy signals and sell signals by identifying upper and lower lines on an asset’s price chart.
Computing the supertrend indicator
The Supertrend Indicator is computed using two parameters: a time period and a multiplier. The time period parameter determines the number of periods over which the Average True Range (ATR) is calculated.
The multiplier parameter determines how sensitive the Supertrend Indicator is to price movements.
For example, here is a step-by-step guide on how the Supertrend Indicator is computed.
Calculate the Average True Range (ATR). The ATR is calculated by taking the maximum of the following three values:
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The current high minus the current low;
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The absolute value of the current high minus the previous close;
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The absolute value of the current low minus the previous close.
The ATR is then calculated over a specified time period. Say, 14 days or so.
Calculate the Supertrend (Upper) Line. The Supertrend (Upper) line is calculated by adding the product of the ATR and the multiplier to the highest high price over the specified period.
Calculate the Supertrend (Lower) Line. The Supertrend (Lower) line is calculated by subtracting the product of the ATR and the multiplier from the lowest low price over the specified period.
Plot the Supertrend Lines on the Price Chart. The Supertrend (Upper) line is plotted above the price candlesticks, and the Supertrend (Lower) line is plotted below the price candlesticks.
Identify the Trend Direction. When the price is above the Supertrend line, it indicates a bullish trend. When the price is below the Supertrend line, it indicates a bearish trend.
The image below provides an exemplary price cart for Bitcoin along with computed Supertrend Upper and Lower lines. Note the red and green lines, representing the Supertrend (Upper) line and the Supertrend (Lower) line, respectively.
Bitcoin Price Chart and Supertrend Indicators (Source:tradingview.com)
It is important to note that the Supertrend Indicator is a lagging indicator. This means that it generates signals after the price has already moved. Traders should use the Supertrend Indicator in conjunction with other technical indicators and risk management techniques to make informed trading decisions.
Trading based on the supertrend indicator
To utilize the Supertrend indicator for your trades, follow these simple instructions.
Identify the trend. When the price is above the supertrend line, it indicates a bullish trend. When the price is below the supertrend line, it indicates a bearish trend.
Enter long positions. When the price crosses the supertrend line from below to above, it generates a buy signal.
Enter short positions. When the price crosses the supertrend line from above to below, it generates a sell signal.
Exit long positions. When the price closes below the supertrend line, it generates a sell signal.
Exit short positions. When the price closes above the supertrend line, it generates a buy signal.
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Supertrend indicator trading examples
Here are some specific examples of how traders can use the Supertrend Indicator.
A trader could use the Supertrend Indicator to identify a bullish trend and then enter a long position when the price crosses the Supertrend line from below to above. The trader could then exit the trade when the price closes below the Supertrend line.
A trader could use the Supertrend Indicator to identify a bearish trend and then enter a short position when the price crosses the Supertrend line from above to below. The trader could then exit the trade when the price closes above the Supertrend line.
A trader could use the Supertrend Indicator to set a trailing stop loss on an existing long position. The trader could move the stop loss up as the price moves higher, and the stop loss would be triggered if the price closes below the Supertrend line.
A trader could use the Supertrend Indicator to identify potential support and resistance levels. The trader could then use these levels to place orders or to manage their risk.
Supertrend indicator advantages
Here are five advantages for traders to keep in mind when using the Supertrend Indicator.
Simplicity. The Supertrend Indicator is very easy to use. It is a straightforward trend-following indicator that generates clear buy and sell signals. Traders can simply plot the Supertrend Indicator on their price chart and look for when the price crosses the line to generate trading signals.
Adaptability. The Supertrend Indicator can be adapted to different market conditions by adjusting the period and multiplier parameters. This allows traders to fine-tune the Indicator to their specific trading style and risk tolerance.
Versatility. The Supertrend Indicator can be used on a variety of financial instruments and timeframes. This makes it a versatile tool for traders who trade different markets and timeframes.
Trend identification. The Supertrend Indicator is very effective at identifying market trends. It can help traders to quickly identify when a trend is starting, continuing, or reversing.
Risk management. The Supertrend Indicator can be used to implement risk management strategies. For example, traders can use the Supertrend Indicator to set trailing stop losses or to identify potential support and resistance levels.
Supertrend indicator disadvantages
Here are five disadvantages that traders should consider when utilizing the Supertrend Indicator.
Lagging indicator. The Supertrend Indicator is a lagging indicator, which means that it generates signals after the price has already moved. This can lead to missed trading opportunities and false signals.
False signals. The Supertrend Indicator can generate false signals, especially during choppy market conditions. This can lead to losing trades and increased risk.
Sensitivity to parameters. The Supertrend Indicator is sensitive to the period and multiplier parameters. If these parameters are not set correctly, the indicator can generate inaccurate signals.
Not a complete trading system. The Supertrend Indicator should not be used as a standalone trading system. It should be used in conjunction with other technical indicators and risk management techniques to make informed trading decisions.
Over-reliance. Traders should avoid relying too heavily on the Supertrend Indicator. They should use it as one tool among many in their trading toolkit.
Here are some specific examples of how the disadvantages of the Supertrend Indicator can impact traders:
A trader could enter a long position based on a buy signal generated by the Supertrend Indicator, but the price could then reverse and move lower. This could lead to a losing trade for the trader.
A trader could exit a long position based on a sell signal generated by the Supertrend Indicator, but the price could then continue to move higher. This could lead to a missed trading opportunity for the trader.
A trader could set a stop loss below the Supertrend (Lower) line, but the price could then traverse the line and generate a false signal. This could lead to the stop loss being triggered and the trader taking a loss.
A trader could rely too heavily on the Supertrend Indicator and ignore other important factors, such as risk management and fundamental analysis. This could lead to poor trading decisions and increased risk.
Conclusion
In this blog post, we have learned how to use the Supertrend Indicator to identify trends and make winning trades. We discussed the basics of the Supertrend Indicator, how to compute it, and how to use it to generate trading signals. We also provided some tips on how to use the Supertrend Indicator effectively to manage risk and improve your trading performance.
It is important to remember that the Supertrend Indicator is just one tool that traders can use to make trading decisions. It is important to use the Supertrend Indicator in conjunction with other technical indicators and risk management techniques to make informed trading decisions.
With practice, you can learn to use the Supertrend Indicator to identify strong trends and generate winning trades. However, it is important to remember that no trading indicator is perfect, and there is no guarantee of success.
Team that worked on the article
Thomas Wettermann is an experienced writer and a contributor to the Traders Union website. Over the last 30 years, he has written posts, articles, tutorials, and publications on several different high tech, health, and financial technologies, including FinTech, Forex trading, cryptocurrencies, metaverses, blockchain, NFTs and more. He is also an active Discord and Crypto Twitter user and content producer.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.