The Supertrend indicator is a tool used in technical analysis that’s designed to identify the current trend in the market and provide buy and sell signals to traders. The Supertrend indicator is fairly easy to analyze, and is used by novice and advanced traders alike.
Initially, the Supertrend indicator was used by commodities traders, but it is now also popular among stock, crypto and forex traders. The indicator was invented by Olivier Seban.
Tesla stock weekly price chart with Supertrend indicator.
Supertrend strategy – How to trade with the supertrend indicator?
If the price of the asset is above the Supertrend line, the Supertrend indicator is signaling a bullish trend and an opportunity to buy or stay long.
Conversely, if the price of the asset is below the Supertrend line, the indicator is signaling a bearish trend or an opportunity to sell or stay short.
Please keep in mind that the Supertrend indicator is designed for use with assets that have a clear price trend. In sideways markets, the Supertrend indicator can produce false signals.
Therefore, it’s not a good idea to rely on the Supertrend indicator alone – it’s important to also use other indicators and charting techniques to make more informed trading decisions. For example, consider combining the Supertrend indicator with moving indicators and/or RSI to get a stronger confirmation of where the price is likely to go next.
Supertrend benefits
Now, let’s quickly go through some of the main reasons for why the Supertrend indicator is popular and highlight some of the situations where it can be helpful.
- Simplicity: Supertrend is an easy indicator to understand, which makes it suitable even for those who are just starting their technical analysis journey.
- Utility for risk management: The lines plotted by the Supertrend indicator can be viewed as dynamic support and resistance levels. This can come on handy when trying to determine where to place your stop loss.
- Confirming the market trend: The Supertrend indicator is very good at confirming a continuation or change in the trend, particularly when used in conjunction with other indicators.
- Versatility: The Supertrend indicator can work with multiple timeframes (although typically on the longer end of the spectrum), and its multiplier can be modified to adjust the indicator’s sensitivity.
Supertrend disadvantages
Every indicator has to make compromises somewhere. Here are some of the most important weaknesses of the Supertrend indicator:
- Lagging indicator: Similarly to the simple moving average (SMA), Supertrend is a lagging indicator. Therefore, it shouldn’t be interpreted as an indicator that predicts a change or a continuation of the trend, but rather as an indicator that confirms a change or a continuation of the trend.
- Longer timeframe: The Supertrend indicator is usually utilized to analyze daily or weekly charts. In shorter timeframes, for example on an hourly chart, Supertrend tends to produce more false signals and noise.
- Not suitable for sideways markets: When it comes to analyzing markets that don’t have a clear direction (sideways movement or “chop”), the Supertrend indicator is not the best choice.
What’s the Supertrend indicator formula?
Calculating the Supertrend indicator is actually fairly straightforward. Here is the Supertrend indicator formula:
(High + Low) / 2 + Multiplier * ATR
Let’s break down the components of the formula:
- High: The highest price during the selected time frame.
- Low: The lowest price during the selected time frame.
- ATR (Average True Range): A volatility indicator that shows an asset’s average price variation within the selected time frame.
- Multiplier: A constant value that can be adjusted to change the Supertrend indicator’s sensitivity to price movement. The higher the multiplier is, the less sensitive the indicator is. A low multiplier might be too sensitive and produce more false signals, while a high multiplier might be too slow to produce actionable signals. Typically, a multiplier of 3 is used as the default.
Supertrend FAQs
Now, let’s quickly address some of the most common questions users have about the Supertrend indicator.
What’s the difference between Supertrend and moving averages?
A moving average is a very popular technical indicator that provides a steadily updated average price of an asset over a selected time period. A moving average reduces the impact of short-term price fluctuations.
Meanwhile, the Supertrend indicator is designed to help traders confirm market trends. Supertrend can be used to confirm either a continuation or a change in an asset’s price trend.
Supertrend indicator success rate – How reliable is Supertrend?
The Supertrend indicator is reliable when it comes to confirming trend continuations or changes. As a lagging indicator, however, it’s not suitable for trying to predict future trends. For best results, the Supertrend indicator should be used in combination with other indicators such as moving averages and RSI.
What time frame is Supertrend used with?
Supertrend is most commonly used with long term charts, for example a daily or weekly chart. When used with shorter term price charts, Supertrend tends to generate more false signals.
The bottom line
The Supertrend is a great tool for any trader’s arsenal of technical indicators. This indicator is simple to use, and can confirm market trends with solid reliability. However, it’s important to keep in mind that the Supertrend is a lagging indicator, and is also not suitable for analyzing markets that are moving sideways.
If you’re looking to learn more about technical indicators and trading, make sure to take a look at our candlestick pattern cheat sheet.
Source: https://coincodex.com/article/37615/supertrend-indicator/