Supertrend Indicator Formula: Every individual enters the stock market with the intention of making money. The most simple way an individual can make money in the market is by following the trends that are present.
Individuals can use various parameters to identify the trends in the market in order to bet on it. One of the parameters that the individuals use is the Supertrend indicator.
In this article, we are going to discuss the supertrend indicator formula and also see how individuals can use this indicator.
What Is A Supertrend Indicator?
The Supertrend Indicator was developed by Oliver Seban. As suggested by its name, it indicates the direction of price movement in a market that is trending.
It is plotted on the charts which helps the individuals to see the overall trend of a particular security. The line in the indicator turns red when the stocks have dipped below the supertrend and its turns green when the prices have risen above the supertrend.
The super-trend indicator is dependent on 2 dynamic values average true range and multiplier. Before proceeding on supertrend indicator, let us first understand what is average true range (ATR)
What Is Average True Range?
It provides an average range the stock will move over a given period of time. It gives us the volatility in the price of the security over a period of time. It is arrived at by calculating the difference between the highest and the lowest price in a particular time span.
Say, for example, if the price of a particular share has moved between the price of 104 and 108 during the day, the average true range for the stock will be 4 (108-104).
The average true range for a stock during a volatile market will be high and when the stock is moving sideways, the value of the average true range will be low.
What Is The Setting Supertrend Indicator?
This indicator is pretty simple to use and it comes with its own default settings. The default parameter for this indicator comes with an ATR of 10 and a multiplier of 3.
All that needs to be done by anyone willing to use this indicator would be to select the indicator and select the timeframe in which you want to trade in. The settings of the ATR and the multiplier can be changed depending on the preference of the individuals.
Now that we have understood all the basic concepts of supertrend indicator, let us now see the supertrend indicator formula which helps us in identifying the trend.
Supertrend Indicator Formula
As the supertrend indicator consists of a red line and a green line, there are two formulas that are used for this indicator. The calculation for supertrend indicator formula is stated down below:
- Supertrend indicator formula when the trend is bearish (Red Line)
(High + Low ) / 2 + multiplier x ATR
- Supertrend indicator formula when the trend is bullish (Green Line)
(High + Low) / 2 – multiplier x ATR
Now that we have understood the Supertrend Indicator Formula, let us now see the ways to use this indicator
Identifying the Buy and Sell Signals
The super-trend indicator helps individuals identify the bullish or the bearish trend in the market by appearing below or above the stock and changing its colour to green or red. Based on this individuals can take a long or a short position in the stock.
The super-trend indicator gives us an entry point when the line moves below the closing price and turns green. The exit point is indicated when the line moves above the closing price and turns red.
Furthermore, you will notice that the point where the buy or sell signal is generated is the crossover point.
Supertrend Indicator For Support And Resistance
Another important use of the supertrend indicator is it will provide individuals the support and resistance levels to enter and exit trades. It can further be used to also set stop losses.
When the buy signal (green) is active, you can enter or go long at this level, which also serves as a support level, when prices decline toward the indicator.
Similarly, when the prices are close to or in contact with the indicator (when the line is red), it acts as a resistance level and indicates a sell signal
Similarly, even the stop losses can be placed with the help of this indicator.
When the supertrend indicator is showing a bullish trend, you can enter a long position in the stock and place the stop loss below the green line of the super trend. This means you exit your long position when the stock price crosses below the green line.
When the supertrend indicator is showing a bearish trend, you can enter a short position in the stock and place the stop loss above the red line of the super trend. This means you exit your short position when the stock price crosses above the red line
Trading Strategy Using Supertrend And Moving Average Crossover
This is a simple strategy that uses the 5&20 EMA along with the supertrend indicator. In this strategy, when the 5 EMA crosses above 20 EMA and the supertrend indicator is below the share price (i.e. The supertrend is green), it is a good indication to enter a buy position.
Similarly, when the 5 EMA goes below 20 EMA and the supertrend indicator is above the current share price (i.e. The supertrend is red), it is a good indication to enter a sell position.
Advantages Of The Supertrend Indicator
- The supertrend consists of lines that shadow the price chart in red or green colour which makes it simple to identify buys and signals.
- The lines that are created in the supertrend can be used to identify support & resistance levels as the prices tend to bounce from these levels. It can also be used to set a stop loss when the price goes beyond the supertrend line.
- Can be used in conjunction with other indicators. It can be used with indicators like moving averages which can give more accurate signals.
Disadvantages Of The Supertrend Indicator
- The SuperTrend indicator is not very effective in ranging or sideways market conditions, as it is designed to follow trends.
- The SuperTrend indicator can provide late signals, as it is a lagging indicator. This means that it can sometimes miss the start of a trend and only provide signals after the trend has already been established.
Also Read: 8 Best Books For Intraday Trading – Top Reads For Beginners!
In Closing
In this article, we discussed the meaning of supertrend indicator and average true range, supertrend indicator formula, and various methods of using the supertrend indicator.
The Supertrend Indicator is a useful tool for individuals who are looking for a simple and reliable way to identify trends in the stock market.
But, it should not be used on its own and should be used in conjunction with other technical analysis tools. It can be an effective tool for individuals who are looking to improve their decision-making process.
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