The Supertrend is a trend-following indicator based on the average true range (ATR). It was invented by French writer and financial advisor Olivier Seban as a tool to detect trend changes by monitoring trend direction and volatility. The indicator works for all trading styles (scalping, intraday, position, etc.) and can be used on all instruments.
How Does it Work?
The Supertrend indicator signals trend reversal opportunities for traders.
Also, traders can use the Supertrend to tell the underlying market trend. In an uptrend, candlesticks open and close above the line. Conversely, when candlesticks close below the line, the instrument is in a downtrend. You can go ahead and try out the Tradingview indicators and find out more.
The indicator appears as a single line or band on the chart. The line or band usually turns red or green to illustrate up- and down-trend signals.
The Supertrend indicator uses two main configurations. These settings alter the indicator’s sensitivity to price:
- ATR Period: The lookback length for the ATR calculation
- Multiplier/ Offset: The amount by which the ATR is multiplied to offset the bands from the price
Calculation
The Supertrend indicator is derived from the following calculations:
HL2 = (High + Low) / 2
Upper Band = HL2 + (Multiplier * ATR)
Lower Band = HL2 – (Multiplier * ATR)
Upper Band = {(Current Basic Upper Band < Previous Final Upper Band) and (Previous Close < Previous Final Lower Band) then (Current Basic Lower Band) else previous final Lower Band}
Lower Band= {(Current Basic Lower Band > Previous Final Lower Band) and (Previous Close < Previous Final Lower Band) then (Current Basic Lower Band) else Previous Final Lower Band}
Supertrend= (Current Close ← Current Final Upper Band) then Current Final Upper Band else Final Current Lower Band. (Look at the historical prices of several stocks and trading assets on Tradinview’s charts).
Calculation of the Average True Range
[(Previous ATR * 13) + Current TR]/14
Where 14 represents the period, ATR is then derived by multiplying the previous ATR by 13, adding the current TR, and dividing it by the period (14).
Supertrend Indicator | Indicator Series Click To TweetApplication
The Supertrend indicator is versatile and can be used for different reasons. Here’s how you can use the Supertrend indicator:
- Entry signals: The indicator gives a buy signal when the price closes above it and a sell signal when it closes below it.
- For exit signals: You can exit a buy trade when price closes below the Supertrend. Conversely, you can exit a sell trade when price closes above the Supertrend.
- To place and trail stop losses: In a buy trade, you can place or trail your stop loss below the Supertrend band. In a sell trade, you can place or trail your stop loss above the Supertrend band.
The Supertrend indicator works best in a trending market. In ranging markets, the indicator is unreliable and may give many false signals.
Remember that no indicator is 100% right. For a higher chance of success, use this indicator with other strategies or indicators like the Triple EMA, Bollinger Bands.
Bottom Line
The Supertrend indicator gives traders a reliable way to trade trend reversals and exit their positions before it’s too late. The indicator works well in trending markets, and even better when combined with another indicator or strategy.
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