The Supertrend indicator, also known as the Super Trend indicator, is a momentum indicator used in the identification of trends, the measurement of trend strength and the identification of buy signals and sell signals.
This technical analysis tool was developed by Olivier Seban as a way to capture the momentum of a stock’s price action while also controlling for market volatility.
The Super Trend indicator is based on price ranges and incorporates the Average True Range (ATR) indicator to measure the volatility in a trend.
The Super Trend is broadly applicable in almost every trading strategy and across all time frames, so it is a very common indicator for technical analysis traders.
Swing traders and intraday traders in particular appreciate the flexibility of the indicator, as they operate across multiple time frames every trading day.
Key Takeaways
- The Supertrend indicator is a momentum indicator that uses the Average True Range (ATR) to control for the volatility in the trend.
- The indicator is used to identify bullish trends and bearish trends, measure the strength of these trends and identify buy signals and sell signals.
A Breakdown of the Supertrend Indicator
The Supertrend is a simple indicator that is based on a stock’s recent price range.
Indicators based on historical price ranges offer a more robust analysis of a stock’s momentum than those that focus only on direct price action.
This central range measure is then modified by the Average True Range to control for market noise caused by volatility that can disguise the price’s trend and create false signals.
The indicator is applicable across all time frames, and traders will adjust the indicator’s time periods based on the trend they are examining.
How to Calculate the Supertrend Indicator
The Supertrend indicator has a simple formula that is open to adjustment based on the trader’s specific needs.
(Period High Price – Period Low Price) / [(2+Multiplier) x (ATR)]
The default setting on most trading platforms is for 14 periods.
The default multiplier value is 3, but traders can adjust this value if they wish to increase or decrease the indicator’s response to momentum.
How to Use the Supertrend Indicator
The application of the Supertrend indicator is as simple as its formula.
The indicator shows the direction of trends directly on the stock’s price chart.
- A green line indicates a general bullish trend.
- A red line indicates a general bearish trend.
The indicator also shows the strength of a trend based on the difference between the current price and the trendline.
This difference is presented as the shaded area between the price line and the trendline.
- A large shaded area represents strong momentum.
- A small shaded area represents weak momentum.
Identifying a stock’s price trend is generally a first step to understanding a stock’s price action and setting up trades for execution.
Being able to reduce or eliminate the market volatility noise with the ATR measure included in the indicator helps to reduce false signals and better measure the actual strength of trends.
Beyond identifying trends and measuring their trend strength, the indicator can also be used to find trend reversals that are ideal entry signals and exit signals for trades.
These trend reversals are identified by observing the interaction between the trendline and the price line, or opening prices, closing prices, high prices and low prices on a candlestick chart.
Bullish Price Cross
When the price movement crosses above the trendline in a bullish trend, this is a bullish cross.
A price breaking above the trend resistance level indicates that the price is exiting its recent range in a positive direction, which is a bullish signal for a stock.
Positive reversals are a signal to buy a stock or to close a short position.
Bearish Price Cross
When the price movement crosses below the trendline in a bearish trend, this is a bearish cross.
A price breaking below the trend resistance level indicates that the price is exiting its recent range in a negative direction, which is a bearish signal for a stock.
Negative reversals are a signal to sell a stock or to enter a short position.
The Best Tools for the Supertrend Indicator
The Supertrend indicator is a powerful tool that is widely applicable in technical analysis.
Price chart trends are relevant in almost every trading strategy, and the indicator’s universal time period relevance makes it an ideal tool for trend analysis.
However, it often sends false signals, especially at lower multiplier values, so it should be combined with other technical indicators using an advanced market research tool.
Our top recommendations for market research tools for retail traders are:
Being able to apply the Supertrend indicator directly to a price chart on your trading platforms is ideal for executing trades.
Technical traders should have access to the full range of technical tools directly on their trading platform for flawless trade execution.
Our top recommendation for advanced trading platforms for retail traders is:
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