Supertrend Indicator

The Supertrend
Indicator is a technical
analysis tool that can
assist investors in
identifying market
trends.
the indicator is useful for capturing the direction of an asset’s
momentum and is widely employed when looking at stocks,
currencies, and commodities. It plots a line on the price chart,
which acts as a dynamic level of support or resistance,
helping traders and investors make informed decisions about
entry and exit points.
 • The Supertrend Indicator is quite straightforward. Its line is computed by
adjusting the asset’s closing price with a value derived from multiplying the
average true range (ATR), which is a measure of market volatility, and a
specified multiplier.
• When the price is above this line, the market is considered to be trending up,
signaling a buying opportunity. Conversely, when the price is below the line,
the market is trending downward, indicating a sell opportunity.
• The Supertrend Indicator is notably helpful in markets when prices are going
in a clear direction, upward or downward. It is often used with other technical
indicators for a more comprehensive trading strategy.

The Supertrend Indicator

The indicator gained prominence when it was
integrated into various trading platforms. It is now a
staple in markets for stocks, currencies, and
commodities for identifying and following market
trends.
 Calculating the Supertrend Indicator
The formula for the Supertrend Indicator is
designed to capture the direction and volatility of
an asset’s price. It can be formulated as follows:

1. High and low: These are the highest and lowest prices of the asset
during a specified time frame.
2. ATR: This measures market volatility. The ATR is calculated based on the
highest and lowest prices, as well as the closing price of the asset over a
specified time frame.
3. Multiplier: This is a constant value that traders and investors employ to
push the indicator to be more or less sensitive to price movements.
Generally, whole numbers are used, but the multiplier can be made more
specific to fit your trading strategy.
 Understanding the Supertrend Indicator
Traders and investors interpret the Supertrend Indicator through its line’s position relative to the asset’s price and its
changes in direction. When the asset’s price is above the supertrend line, it generally indicates a bullish trend.
Traders and investors often consider this a signal to buy or maintain long positions. Conversely, when the asset’s
price is below the supertrend line, it suggests a bearish trend. This is generally interpreted as a signal to sell or
maintain short positions.
A change in the supertrend line from below to above the asset price or vice versa might signal a trend reversal. You
could take this as an opportunity to enter or exit positions.
The multiplier in the Supertrend Indicator is employed to adjust the indicator’s sensitivity. A higher multiplier makes the
indicator less sensitive to price changes and reduces false signals. But it could delay your investment moves.
Alternatively, a lower multiplier makes the indicator more sensitive, providing quicker signals but also increasing the
risk of false positives.
Since the Supertrend Indicator incorporates ATR, it adjusts in line with the market’s volatility. This makes it adaptable
to different market conditions and asset types. Also, the indicator could be applied to various time frames, from
intraday to daily or weekly charts.
Using the indicator effectively requires knowing about its strengths and limitations. The indicator is very dynamic,
helping to recognize the general direction of a trend. However, a more comprehensive strategy could be developed by
combining it with other fundamental and technical analysis indicators.
Simplicity: The indicator is straightforward to use and interpret, making it great for traders and investors of all
experience levels.
Dynamic support and resistance: The indicator could provide dynamic support and resistance levels,
adjusting itself based on market conditions. This adaptability makes it a versatile tool for various trading
strategies.
Trend identification: The indicator identifies the general direction of a market trend. This can help you make
more informed decisions on entry and exit points.
Asset volatility: Including the ATR in the formula allows the indicator to adjust for volatility, making it adaptable
to different conditions and assets.
Risk management: By providing clear signals for trend direction, the indicator can help you know where to set
stop-loss levels, reducing potential losses.
Multiple time frame analysis: The indicator can be applied to various time frames, from intraday to long-term
charts, offering flexibility in trading and investment strategies.
Confirmation tool: The indicator is more reliable when used with other technical indicators like moving
averages or the relative strength index (RSI) for confirmation.
Versatility: The indicator can be used across different asset classes, including stocks, currencies, and
commodities, making it handy for diverse trading and investment portfolios.
The Supertrend Indicator is a trend-following
indicator. An example of the indicator can be
illustrated with the exchange-traded fund (ETF)
QQQ on a daily chart.

The buy condition of this strategy occurs when

the closing price crosses above the supertrend
line. This condition would also close any existing
short positions. Conversely, the sell condition is
when the close price crosses below the
supertrend line. Any existing long positions would
be closed.
The results are as follows:

Net profit of 8.37% ($83,735.36)

Total closed trades: 5
Percentage of profitable trades: 40.00%
Profit factor generated: 1.861
Maximum drawdown: 8.56%
Buy and hold return over a similar
period: 16.69%
Overview of the Supertrend Strategy
Results on QQQ Daily Chart.
TradingView