Most traders are familiar with following trends. Whether tracking trends found through fundamental analysis, reading cryptocurrency news, or identifying chart patterns, following trends in markets has proven itself lucrative time and again. However, among the many market movement indices available, the Supertrend indicator is still vastly underutilized.
Like other trend-following technical analysis overlays like the simple and exponential moving averages, the Supertrend indicator helps investors gauge market movements. In a trending market, it can be used as a confirmation tool that depends on price action. We’ll walk you through using this technical trading tool while showing you how and when to apply it to your own cryptocurrency trading.
How Does a Market Trend Work?
Charting generally refers to mapping the market movements of assets onto a graph. As assets rise and fall, a directional pattern of the market trend emerges. Market trends define the general course that an asset is taking.
Trend indicators alert the trader about developing trends before or as they’re happening, and they warn of impending reversals. You also get a short and long-term price direction while confirming observations in other technical indicators and cryptocurrency asset value patterns.
What Is a Supertrend Indicator?
The Supertrend indicator is an overlay built into technical analysis charting platforms that change color based on the trend detected. It is a lagging indicator (trend-following indicator) that generates a buy or sell signal after a trend or reversal is underway. Supertrend works well in trending markets but could be inaccurate when the market is trading in a range.
For example, if the cryptocurrency closing price is found to be above the line, the indicator turns green, indicating that the trader should open a buy signal. Once the closing price falls and closes below the line, the Supertrend indicator turns red, showing that the trader should open a sell signal.
A Supertrend indicator is plotted on the price of an asset and relies on two parameters: a period for the average true range (ATR) and the multiplier. The ATR indicates the overall price range for an asset, offering an indication of its volatility. It provides information on the trading range and how far an asset has been moving. We’ll examine below how to calculate the indicator.
Characteristics of Supertrend Indicators
Supertrend indicators are characterized by red and green lines. A green indicator represents a buy signal, while a red indicator is a sell signal. The point where the indicator line changes color is called the crossover point. You’ll gauge the market’s bullishness by the green line, the bearishness by the red, and determine support and resistance zones that can be used to determine the stop-loss levels.
Traders find that the Supertrend indicator works well in a trending market, but false signals are often generated when the market moves sideways.
How to Calculate Supertrends — Best Settings And Parameters
To calculate the Supertrend, you need to input the period, which specifies the number of days of the average true range (ATR) used. Then the period is multiplied by the multiplier.
The ATR period defines the range of the asset price used to calculate the trend line. For example, when the ATR period is set to 10, the indicator analyzes the highs and lows of the last ten days. The combined high and low prices are divided by a value of 2, from which the product of the multiplier and the ATR value is subtracted for uptrends and added for downtrends.
- Uptrends (shown in green): [(High Price + Low Price) ÷ 2] − (multiplier × ATR)
- Downtrends (shown in red): [(High Price + Low Price) ÷ 2] + (multiplier × ATR)
The Supertrend indicator usually comes with a default setting of ATR 10 and a multiplier of 3. For different assets, there is no single best parameter to use. The ATR observed will depend on the cryptocurrency and the period watched during intraday trading.
Lowering the parameters of the Supertrend indicator increases the number of buys and sell signals. Most traders find themselves lowering the parameters when they want faster signals. However, lowering the parameters also increases the number of false signals, otherwise known as whipsaws, making confirming trends with other indicators like the MACD or the RSI almost essential.
What Does a Supertrend Look Like?
As mentioned, at the moment that you plot a Supertrend, a continuous red and green line with various entry and exit points marked by upward green arrows or downward red arrows displays on your chart. You’ll notice the unbroken red and green line on the image above; that’s the Supertrend.
Identifying Buy and Sell Signals with Supertrend Indicators
Identifying buy and sell signals using a Supertrend indicator is as straightforward as waiting for the indicator to switch as it crosses over the closing price. At the moment that the Supertrend closes lower than the closing price, the line turns, green indicating a buy signal. Conversely, when the Supertrend closes above the price, the line turns red, indicating a sell signal.
Combining Supertrend with Other Indicators
The simplest way to identify buy and sell signals with a Supertrend indicator is to plot them on a chart and look for the entry and exit indicators based on the color switch. Combining indicators is an essential step that helps traders weed out false signals. Here is a selection of reliable strategies for identifying buy and sell signals along with Supertrend indicators and other overlays.
Relative Strength Index (RSI) Indicator and Supertrend
A great way to determine entry and exit points for your trades is to combine the RSI indicator with a Supertrend indicator. Measure the momentum of your potential trade by observing whether it’s overbought or oversold by using the RSI and its default period of 14.
An RSI value below 30 typically indicates that the market is oversold, with most traders accepting a price crossing above 30 to be a buy signal. An RSI value above 70 normally indicates a cryptocurrency is overbought, and when the price crosses below 70 from this point, a sell signal is generated. Use the RSI to confirm your Supertrend indicator. If both show that the market is trending, it’s safer to assume that your signals are reliable.
Supertrend and MACD
Combining a Supertrend indicator with the MACD indicator’s ability to measure trend strength is a useful technical analysis strategy. Just like the Supertrend indicator, the MACD works best in a trending market. Uptrends are indicated by the MACD crossing above the zero lines, which traders recognize as a buy signal. Downtrends are indicated by the MACD line crossing below the signal, showing a sell signal.
The recommended day trading parameters for a MACD indicator are 26-13-9 on a 10-minute chart, varying based on the period observed. The first value, 26, represents the faster-moving average of the last 26 candles represented as the MACD line. It can be any period the trader prefers, relative to the duration and number of candles representing it. The second value is the slower moving average of the last 13 candles shown as the signal line (also variable based on the time interval of your chart, and conventionally half of the first value). Finally, the third parameter is the number of candles used in calculating the difference between the faster and slower moving averages.
Traders will notice convergence happening as the histogram gets smaller when the moving averages approach each other’s value. Divergence is signaled as the histogram gets bigger, indicating that the two moving averages are further separate from each other. Each of the MACD’s lines reacts at different speeds.
When they cross over, a new trend is indicated. If the faster moving average crosses under the slower moving average, there’s a new downtrend, and the histogram temporarily vanishes. Conversely, a new uptrend is indicated when the slower moving average crosses above the faster-moving average. Confirm your entry and exit points by comparing the color of your Supertrend line with the trend reflected by the MACD.
Supertrend And Parabolic SAR
Another popular combination of indicators for traders is Supertrend and Parabolic SAR. The Parabolic SAR is also called a stop and reverse trading system. Like the Supertrend indicator, it works in trending markets to measure the strength of the trend. Plotting the Parabolic SAR on your chart results in a series of dots. If the dots move above the current price, traders interpret that as a bearish signal, while when found below the current price, a bullish signal is indicated.
The Parabolic SAR is a more sensitive indicator than Supertrend. Both process different data, making the combination highly effective for short-term investors. After adding both indicators to your chart, observe the Supertrend line relative to the dotted Parabolic SAR to gauge the accuracy of your buy and sell positions.
Sample Strategy to Day Trade with Supertrend Indicator
Here are two sample trading strategies using Supertrend to determine viable entry and exit points for profitable trades.
Two Supertrends and a Stop Loss Trading Strategy
Set your time interval to 5, 10, or 15 minutes for day trading, and your chart to candlesticks. Load the Supertrend indicator into your chart using a period value of 7 and a multiplier of 3. Load a second Supertrend indicator and set the ATR period to 10 and the multiplier to 3. This is the indicator that will show you the primary direction of the trend. With this setup ready, a day trader will watch the chart, waiting for the second Supertrend indicator to change from red to green or vice versa.
As soon as it does, wait for the first Supertrend to match the second one, such as turning green as in our example above, and then opening a buy order. If you haven’t managed to catch the first entry point, monitor the smaller Supertrend for when it changes color, indicating a new opportunity. Set your stop loss at the previous low price of the cryptocurrency you’re trading whenever you open a new position and sell at the switch.
RSI Indicator & Supertrend Trading Strategy
Using a Supertrend indicator combined with an RSI indicator eliminates many whipsaws while generating more accurate buy and sell signals in moving markets. Apply the RSI indicator with a length of 7 to a 5-, 10- or 15-minute chart.
Plot a Supertrend line with a period of 5 and a multiplier of 1.5. Observe the movement and buy if you see a buy signal on the RSI along with a buy signal from the Supertrend within two or three candlesticks. Traders sell when a sell signal occurs on the RSI, with the Supertrend confirming it within two to three candles as well.
Best Time To Use the Supertrend Indicator
The best time to use a Supertrend indicator is when a market is in a strong uptrend or downtrend. Intraday, the indicator can help determine entry and exit positions. Use trading setups containing the Supertrend indicator when you’re day trading and observing short time intervals of 5, 10, or 15 minutes.
While a favorite tool of day traders, the Supertrend indicator is versatile enough to be used across many different time frames — as long as the trend is clear. As discussed, using the Supertrend indicator with other technical indicators provides a greater degree of accuracy.
How Reliable Is the Supertrend Indicator?
Supertrend is a highly reliable indicator in trending markets, although it may be a lagging indicator because it depends on existing price action. It is highly recommended to use other indicators to confirm the signals. For example, parabolic SAR and MACD are good indicators to confirm the current trend and assess if the trend sustains. When used in combination with other signals, the indicator can be used more reliably.
Trading Rush tested a trading strategy using both RSI and Supertrend indicators to confirm entry and exit points. After 100 trades at a1:1.5 risk-to-reward ratio, the strategy earned itself a win rate of approximately 45 percent.
The Bottom Line
The Supertrend indicator is one of the quickest technical analysis tools, and it takes very little technical knowledge to implement successfully. Using multiple indicators and combining Supertrend with other overlays will help to decrease the chances of false signals. Traders are advised to test out various parameters and indicator combinations to identify profitable entry and exit points.