Supertrend Indicator - Formula, Settings, PDF, Strategy for Scalping, and Intraday Trading
- Profile Traders
- Jul 24, 2022
- 5 min read
Updated: Oct 22, 2023
The super trend indicator was developed by Olivier Seban, and it has become a popular tool for traders in recent years. It can be used to scalp the markets or trade them intraday.
It is simple to use and provides visual signals to help you confidently enter and exit trades. This blog post will explore using the super trend indicator in scalping and intraday trading.
We will also examine some of the pros and cons of using this indicator. Finally, we will provide some tips for traders who want to use the super trend indicator in their trading strategies.
Content
What is Supertrend Indicator?
Supertrend is a trend following indicator quite similar to Moving Average Convergence Divergence (MACD) or Moving Averages (MA). However, with a simple commonsense, we can also use it in a range-bound market.
It is directly plotted on the price chart, and the color of the supertrend indicator indicates the ongoing trend in a particular scrip.
If the color of the supertrend is green and the price is above the supertrend indicator, then it denotes an uptrend.
Similarly, if the color of the supertrend is red and the price is below the supertrend indicator, then it denotes a downtrend.
Supertrend Indicator Formula
Average True Range (ATR) plays a crucial role in arriving at supertrend values:
The supertrend indicator calculation is shown below–
Supertrend Upperband = (high + low) / 2 + multiplier x ATR
Supertrend Lowerband = (high + low) / 2 – multiplier x ATR
Calculation of Average True Range – [(Prior ATR x 13) + Current TR] / 14
Here, 14 indicates a time period. Hence, the ATR is calculated by multiplying the previous ATR with 13. Add the latest TR and divide it by time period.
Supertrend Indicator Settings
Supertrend is plotted using two parameters:
ATR Length (default value is 10) and
Factor (default value is 3)
Traders can change these default parameters. However, it also changes the way of plotting the supertrend values. It is sensible to use the default parameters unless you know what you are doing with the changes.
Supertrend Indicator Strategy for Intraday Trading
Super Trend works beautifully in trending markets. However, it is risky to plan a long trade whenever the indicator turns green or a short trade whenever the indicator turns red.
Because in intraday trading, markets are often volatile, it can change the color (red to green and vice-versa) quite frequently. Hence it is better to wait for the next pullback for long trade (or bounce for a short trade). Image 3 shows the example of supertrend behavior in volatile market conditions.
Any market will not move in a straight line. It gives small pullbacks (due to profit booking), gathers energy, and then it moves upside. We can use the same logic for intraday trading using the supertrend indicator.
Image 5 shows a long trade example in intraday trading.
It is a Banknifty 15-min chart (because 15-min is the ideal timeframe for intraday trading in India).
Supertrend displayed green which indicates the beginning of the uptrend in 15-min timeframe. We should not look for a long trade here as it can be risky.
But later, it gives the pullback near supertrend indicator, which is the right opportunity to take a long trade.
Traders can also use powerful candlestick patterns such as bullish engulfing, hammer, etc to confirm the proper entry.
Any scrip will not fall in a straight line (except in some extreme cases). It gives small bounces (due to some buying), and then it moves downside again. We can use the same logic for intraday trading using the supertrend indicator.
Image 7 shows a short trade example in intraday trading.
It is a Nifty 15-min chart (because 15-min is the ideal timeframe for intraday trading in India).
Supertrend displayed red, which indicates the beginning of the downtrend in 15-min timeframe. We should not look for a short trade here as it can be risky.
But later, it gives the bounce near the supertrend indicator, which is the right opportunity to take a short trade.
Traders can also use powerful candlestick patterns such as bearish engulfing, hanging man, pinbar, etc to confirm the proper entry.
However, please ensure to include the proper stop-loss (below the entry candle or below the supertrend readings) and proper money management rules (risk only 2-3% of your capital per trade.
You can read "The Subtle Art of Intraday Trading" book to know 10 Profitable Intraday Systems, which are backtested with 10 years of historical data of Banknifty (along with backtested results).
Supertrend Indicator Strategy for Scalping
Scalping is a trading strategy that involves holding a position for a very short period of time, usually just a few seconds to a few minutes, and then closing the position. Scalpers hope to make small profits on each trade, which they can then quickly compound by reinvesting their profits and making additional trades.
While scalping can be a profitable strategy, it is also a very risky one. Beginner traders are often drawn to scalping because they think it will be an easy way to make money, but the reality is that it takes a great deal of skill and experience to be successful at scalping.
There are two main risks associated with scalping:
Over trading - overtrading is perhaps the biggest danger of scalping and can lead to big losses very quickly, so it is important to always stick to your trading plan and only take as many trades as you have planned.
Not using stop-losses is another major risk associated with scalping. The price can move in the opposite direction and can cause major damage to your capital.
Scalping can be a profitable trading strategy, but it is also a very risky one. Beginner traders should know the risks before attempting to scalp the markets.
The same supertrend intraday trading strategy can be used even for scalping. But traders should use the lower timeframes such as 5-min or 3-min charts. Besides, they should be quick to close the trade as noise is also high in the lower timeframe charts.
The above image shows 5 mins chart of Banknifty.
In the beginning, the supertrend established the uptrend. Later there were two pullbacks at the supertrend level, and the price formed a bullish harami pattern. Hence, it is a good opportunity to take long trades.
The above image shows 3 mins chart of Reliance.
In the beginning, the supertrend established the downtrend. Later there were a couple of bounces near the supertrend level. Hence, it is a good opportunity to take short trades.
Conclusion
One of the most important things to remember when using technical indicators is that they are not 100% perfect. They are merely tools that can give you an edge in the market. The Supertrend indicator is no exception. It is up to the trader to use them correctly and interpret the signals they produce.
Always use money management rules when trading with any indicator. This will help protect your capital if the indicator gives different results due to volatile market conditions. By using sound money management principles, you'll be able to withstand losing streaks and still come out ahead in the end.
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