Supertrend indicator
- What is the Supertrend indicator?
- What is actually a trend?
- How can we use it?
- How it’s calculated?
- Advantages
- Disadvantages
- Best setting
- Trading strategy
- Buy signals
- Sell signals
- How else can we use it?
- The bottom line
What is the Supertrend indicator?
If you want a reliable and simple tool for figuring out the characteristics of the current trend, then one of the best is undoubtedly — Supertrend, a trend following indicator. Another very useful function of this indicator is its versatility — you can use it on crypto and any other trending market.
In addition, Supertrend is able to determine support and resistance levels and distinguish among descending and ascending tendencies without errors.
What is actually a trend?
A trend is a perceived tendency of financial markets to move in a particular direction over time.
The classic definition of an uptrend is when the next highs and lows are higher than the previous highs and lows. Correspondingly, the definition for a downtrend is when the following lows and highs are lower than the previous ones. Sounds simple, but in practice, it`s even simpler.
In order to determine the current trend, just remember what the patterns look like:
How can we use it?
Trend following is a trading strategy whereby you buy a crypto-asset when its price trend is up and sell when its trend is down.
The basic idea is that if there is an established trend, then the price will continue its movement. Supertrend is used to determine such moments.
Sometimes it is not as easy as it looks, sometimes market movements are not as obvious and we have to use additional tools. One of them is Supertrend indicator.
Let’s first find out how it was calculated so we can better understand the logic of this useful tool.
How it’s calculated?
Supertrend Upper Line (Red line) = (High + Low) / 2 + multiplier × ATR.
Supertrend Lower line (Green Line) = ( High + Low) / 2 — Multiplier × ATR.
Where ATR value is taken from the average true range indicator, which will be described more in ATR calculation.
Here we see his several advantages at a glance.
Advantages
- It’s simple, it’s easy to use, and understand how it works.
- The indicator sends out correct entry and exit signals that good works for intraday traders.
- The signals are clearly separated: indicator provides buy signal and sell signal.
- The indicator is available on any trading platform in every good charting software for you.
Below we will elaborate on each of them in more detail.
Disadvantages
- It most effective works when the market is trending, not effective when the market moves sideways. In this case, the indicator’s line starts to provide false signals, which lead to use other indicators (such as moving averages or ATR indicator) to compensate this or wait when there will be a trending market again.
- It shows different results for different crypto assets. Before begin to use this indicator you should backtest it with different parameters for different crypto assets. Pay attention to price volatility.
Best setting
The indicator includes just two parameters, a time period and a multiplier. By default settings, it has a length of 10 and a multiplier of 3, which is good for day trading.
Typically, the indicator takes into account the volatility of crypto-assets when calculating their value, so the time period is used to calculate the average true range (ATR).
Note that changing the period to a shorter one can result in additional buy and sell signals. Smaller settings make Supertrend indicator more reactive to the price which means, more fast and short trend signals. Higher settings remove the noise from the price movements.
ATR is an indicator that measures crypto asset volatility by decomposing the range of an asset price for that period. This is where the calculation comes from for our Supertrend indicator.
Average true range
On the other hand, the sensitivity of the indicator changes, which causes it to react to all market noise, the indicator shows you lots of pivot points for entering and after a short time, the price moves sell signal occurs, including false signals at the short time interval.
In this case, you need to add more filtered signals or use its default values after the initial backtesting of how the indicator works in a particular asset. For this, you can use the same ATR indicator.
It simply shows the range for measuring the level of volatility. Here you can see how the movement of a crypto asset has changed and the interpretation of that movement by this tool:
On the chart below you see the usage of Supertrend indicator with average true range:
Trading strategy
Let’s look at a simple usage of a Supertrend indicator, which suits technical analysis as a trending indicator and helps to use it in different trading approaches such as intraday trading and on any market.
You can easily use it for intraday trading as an independent trading system. And as we recommend using Supertrend Trading Strategy with other confirming trading signals by other technical indicators.
Buy signals
A buy signal appears when the Supertrend’s line turns green:
You also may add an additional indicator, for example, the Relative Strength Index, also known as the RSI indicator. When RSI crosses above its 50 level, wait for the closing price placed above the green line as a confirmation to precise buy. There are accurate signals by Supertrend indicator.
Close a position when the color of the green line changes to red, when the indicator flips, forming below the candle, which is a sell signal:
Try to find yourself when an identical alarm occurs here on different timeframes:
Sell signals
As you may have already noticed, sell signals appear when the Supertrend indicator line is red and the RSI crosses below its 50 level.
Also, wait for the closing price above the line, then open a position. It is recommended to exit positions when the red line of super trend indicator changes color to green starting its formation under the candle, which is a buy signal.
Exited a position as this indicates a change in trend. You see here how we use Supertrend indicator at low price:
In the chart above you can see the continuation of the same trend from the previous chart and how its ends. How did the price move? We have gone through the whole cycle of the position, starting with its opening and closing, learning how to buy and sell using Supertrend indicator with its default setting as an intraday trader, almost without knowing all classical technical analysis.
How else can we use it?
1. Mix with other tools
Use Supertrend indicator in combination with other tools, simply add more signals. Like any other trading tool, the Supertrend indicator works with other indicators such as RSI, MACD, Parabolic SAR and etc. which you should implement in your trading strategy.
This tool has a rich history of use in the stock market, back then it behaved differently depending on the particular stock, the same nowadays with crypto.
The Supertrend additionally acts as strong support or resistance and also clearly shows the recommended levels for setting a trailing stop loss for an existing trade.
For better confirmation signals recommended to combine it with another time interval and adding others indicators.
For example, add a buy signal by another tool such as other Supertrend indicators on different timeframes, or moving averages which also shows the trend direction by its accurate signals, a very simple indicator, good for any trading setups and available on any trading platform.
The best settings lead to the best investment decisions.
2. Closing Price
An important aspect is fixing the price at a certain level. Above or below the indicator lines accordingly. Monitor it for entry and exit confirmation.
The bottom line
The Supertrend indicator will inform you of the trend of the crypto-asset by drawing a line on the bars.
Buy and sell signals are easy to use and can be applied to an existing trading strategy by complementing it.
The color of the line and its position on the trading chart will change depending on changes in the trend.
If the trend is bullish, the green line will form below the candles (which is also a buy signal). If the trend is bearish, it will be a red line above (sell signal). This makes it useful for day trading when the price changes direction several times a day.
You should also adjust this tool to receive less trading signals when the market is too volatile.
Another investment advice is to add a volatility indicator to avoid trading flat and use it in any trending markets to know when there are low prices so you can enter the market. In the case below you see the added HV (Historical Volatility indicator).
So, as we have found this indicator is a very useful tool for trading charts in combination with classical technical analysis, and like all other indicators, it is best applied in combination with other methods of graphical analysis of the current market situation.
As with any indicator you need to optimize it for your trading style and make the proper trading setup that suits your strategy and your working timeframes.
Use the Supertrend indicator on the trending market in the mix with the average price rate.
With this knowledge, you’re able now to use other modernized Supertrend indicators based on this one with the same methodology.
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