Super Trend

Introduction

The world of stocks, bonds, or securities is no stranger to technical indicators capable of deciphering any situation or circumstance pertaining to the market. 

You have the RSI, ATR, EMA, SMA, and many more, with each catering to a specific set of individuals or traders. But the one we’ll be looking at today is called Super Trend. So, let’s get into it then.

What is the Super Trend Indicator?

So, what is the Super Trend indicator all about? To start with, it has turned into a staple within various trading arsenals because of its efficacy and simplicity. 

Olivier Seban is the man behind the indicator’s development, and he released it in 2009, which is a bit early compared to a lot of the other indicators more commonly used, relatively speaking.

But to become that popular is quite the feat, and as for what it’s made for, we’ll look at that below.

The Purpose of the Super Trend Indicator

The supertrend indicator happens to be a trend-following overlay, which appears directly within price charts, offering clear sell and buy signals depending on the underlying price volatility and action of the assets. 

Unlike the more complicated indicators, which may leave traders quite confused, market movements with the supertrend are instead depicted in a more straightforward visual representation, i.e., this single line that shifts color to represent possible trend shifts. 

Hence, a lot of the market noise can be filtered out with this simplicity.

How is the Super Trend Indicator Calculated?

Blending aspects of moving averages, i.e., MAs, and volatility to produce its signals, the ATR, short for average true range, is calculated to factor in volatility for the supertrend indicator. 

hen, with this information, a line is plotted below or above the price action. If the line shows green and is below that price, then an uptrend is implied; above that price, a red line would indicate the exact opposite, i.e., a possible downtrend. Those lines above and below form the upper and lower bands, respectively. 

Through this color-coded system, traders may swiftly evaluate market conditions and conduct some informed decision-making. Also, it should be mentioned that only a single band is displayed on the chart every time. 

As for the criteria regarding what band is to be shown, that would depend on where the prices have closed. i.e., above the final upper band or below the final lower band.

Usually, you will not really have to calculate those supertrend indicator values, as trading platforms will automatically do it for you, so you don’t really need to know all the various formulas that go into these calculations.

Key Parameters of the Super Trend Indicator

The average true range is part of the input that goes into building the supertrend indicator. Yes, but there is one more, a multiplier. 

With the ATR, investors may see the average range that prices swing across a certain period, with the multiplier being what the ATR is just multiplied by to generate those distinct price bands we went over earlier.

In addition, the supertrend indicator’s default values, which are pretty much the standard on trading platforms these days, happen to be an ATR of around 7 to 13 trading sessions with the multiplier set to three. 

While most investors may be fine with these default values, the settings can be adjusted, and these can make the indicator either less or more sensitive to price action.

How to Use the Super Trend Indicator in Trading

Now that you know what the Super Trend indicator is all about, you might want to shift your attention to how you may actually use it in trading.

Buy and Sell Signals

As we’ve already stated, the supertrend indicator is quite a straightforward thing to interpret. 

Once that line is created on the price chart, the trend is bullish if you see the price above the line, and this means that traders could consider long positions, i.e., treat it as a buying signal. 

But if the price is below the line, it gives off a bearish signal, meaning that it could be time now to sell or go short.

Super Trend as Support and Resistance

All those lines that the supertrend indicator plots onto a price chart act as this dynamic level of resistance and support as well, helping investors make more informed decisions regarding exit and entry points.

Combining Super Trend with Other Indicators

The supertrend should not be your only tool for trading. It, like numerous other indicators, works best when paired with other types of technical analysis.

Doing so may make up for its weaknesses, which we’ll get into later on. 

Every technical indicator focuses on a specific element or situation and has its own set of pros and cons. Hence, theoretically speaking, relying on more than one indicator may cover more angles while strengthening your skill of making the correct call.

In fact, experienced traders rarely submit orders using only one indicator. 

They use tools that can complement one another and wait for additional pattern confirmations from the other indicators before carrying on. For instance, you can use the RSI, or relative strength index, to predict how strong the trend can be, which the supertrend indicator may identify.

Super Trend Strategies for Different Trading Styles

While you may have a fair idea of how you can trade using the supertrend indicator, since there are multiple trading styles, how the indicator relates to them is different.

Day Trading with Super Trend

If you want to make this indicator more appealing for your day trading needs, then you can employ shorter ATR time frames and a smaller multiplier so that it becomes more sensitive or reactive, generating more signals, which should be fitting.

Swing Trading with Super Trend

Since swing trading focuses on medium-to-long-term gains, like day trading, the settings can be adjusted accordingly to incorporate medium time frames, and you may then use the indicator to confirm trend reversals, for instance.

Long-Term Investing with Super Trend

In contrast to day trading, with long-term trading, traders can adjust the settings to include longer ATR time frames with larger multipliers, which should make it more ideal for them.

Advantages and Limitations of the Super Trend Indicator

Supertrend is not unique for having its share of limitations. Any indicator you see within the stock market has that, and knowing them only improves the trading experience since you would be able to make up for them.

Benefits of Using Super Trend

The most obvious benefit has to do with how simple and straightforward it is as an indicator. 

The second benefit is implied by its name, which implies that it’s suitable for following trends. And finally, it can be used across multiple time frames, which makes it quite flexible.

Limitations of Super Trend

Now onto the cons. The supertrend is what you would call a lagging indicator, which means that it typically responds to price movements instead of predicting them. 

This may delay your exit or entry should you depend too much on it. Secondly, a trend-centric indicator such as this would naturally do poorly in sideways markets, where there’s little action. 

And lastly, it’s not a standalone tool when it comes to reliability. You cannot just put all your eggs in one basket here. All of this is why you might want to incorporate another indicator for some additional confirmation since false signals will always be a thing.

Conclusion

The supertrend indicator happens to be one of the most widely used and versatile indicators, made primarily to identify the direction of an asset’s price or market.

It offers clear sell or buy signals depending on trend direction, clues regarding where to put stop losses, and can adjust itself for market volatility. 

But, like we mentioned earlier, it isn’t foolproof, with its efficacy wavering depending on market sentiments, the assets themselves, and your trading strategies.