Catching the trend with Supertrend indicator

Calculation, how to use it, & setting alerts.

If you are an active trader, chances are you are using technical analysis that assists you to identify buy and sell signals for your stock. One such indicator is the Supertrend indicator, as the name insinuates, it helps us distinguish the trends in the market.

Supertrend indicator is by far one of the most simplest trading setups furthermore very constructive. The calculation of the indicator is produced by plotting the trend on price and the trend can be circumscribed by the placement of the indicator. It is constructed with the help of 2 parameters — Period and multiplier

Let us further understand the calculation behind this indicator and its application

Let’s Understand it’s calculation:

Supertrend was invented by Olivier Seban which was designed for futures, forex, and equity but works extraordinarily well with high accuracy for all markets. Another reason why this is popular among the Wallstreet community is because of the simplistic application

Basic upper band = (High + Low) / 2 + Multiplier * ATR
Basic lower band = (High + Low) / 2 — Multiplier * ATR

(ATR — Average true range)

Now that we have seen the calculations of the indicator, Let us understand the application of the indicator.

Illustration 2: Supertrend Indicator with buy and sell signals

With the help of the illustration above, we become competent that, when the Supertrend line turns green it is a buy signal and vise versa. The trading strategy for such a set up is discussed below.

• Buy Signal (Long)
  When the overall market trend is up/positive
  When Supertrend gives a buy signal on a 5 min chart
• Sell Signal (Short)
  When the overall market trend is down/negative
  When Supertrend gives a sell signal on a 5 min chart

*Note The above-mentioned strategy is for educational purposes only and does not pose any recommendation to the stock or strategy.

The efficaciousness is determined by how this strategy has performed in the past for a set of stocks. I have consolidated the same strategy on Streak.world and also embedded the backtest results for explicit apprehension.

Illustration 3: Backtest results with super trend indicator on the 5-minute time frame.

Illustration 4: Here is the embedded backtest of the stock on a real-time basis

With the real-time backtest results you can easily calculate the greeks of the stock compare the backtest performance for a better understanding of maximum drawdowns, period return, backtest period, etc.

The bottom line:

The best thing about the super trend it sends out accurate signals on precise time. The indicator is accessible on various trading platforms free of cost. The indicator offers quickest technical analysis to enable the intraday traders to make more agile decisions. As said above, it is extremely effortless to use and concede.

However, the indicator is not appropriate for all the situations. It works when the market is trending. Hence it is best to use for short-term technical analysis. Supertrend uses only the two parameters of ATR and multiplier which are not sufficient under certain conditions to predict the accurate direction of the market.