Generally, trading is a very challenging game. You have undoubtedly heard the crazy statistic that 90% of traders lose money. While you might assume it is exaggerated, this is a harsh reality about the financial markets. They are designed to transfer wealth from the masses to a smaller portion of participants. If you are wondering how you can be a part of this successful cohort, we have a crucial piece of the puzzle here: a robust analysis method. In this blog post, we will analyze the Supertrend Indicator to determine whether it is truly the best trend indicator or not.
We will begin by introducing the Super Trend indicator and analyzing its mathematical basis. Then, we will explain how it works using intuitive examples and authentic price chart images. We will also present a binary options trading strategy using the Supertrend Indicator to help you produce consistent profits with a mechanical approach.
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What Is the Supertrend Indicator?
The SuperTrend Indicator is a useful technical analysis tool designed by Olivier Seban to identify market trends and potential entry and exit points. It generates buy and sell signals by plotting a line on the price chart. The price above the SuperTrend line suggests a bullish trend, indicating potential long positions. On the contrary, when the price is below the line, it signals a bearish trend, suggesting potential short positions.
The indicator blends two dynamic values, period and multiplier, and utilizes the Average True Range (ATR) to measure market volatility. By default, it uses a multiplier of 3 and a period of 14 for ATR. However, you can customize these parameters according to your preferences.
The Super Trend Indicator’s strength lies in its simplicity and adaptability. These characteristics make it suitable for traders of all skill levels. You can also use the Supertrend indicator for risk management by employing the Supertrend line as a dynamic stop-loss level. So, you can adjust your stop loss based on market movements.
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What Are the Calculations Behind the Supertrend Indicator?
The SuperTrend value is derived from taking the average of an asset’s highest and lowest prices over a given time period and adding to that a multiplier times the Average True Range (ATR). The ATR measures an asset’s volatility based on its high, low, and closing prices over that same time period.
The multiplier is a constant value, typically a whole number. It allows traders to adjust the indicator’s sensitivity to price movements. A higher multiplier makes the indicator less sensitive to price fluctuations.
Supertrend Strategy Pro Tip: Adjust the multiplier based on the volatility of each asset class and the risk parameters of your own trading strategy.
In essence, the Supertrend indicator combines the midpoint of the asset’s trading range with a scaled volatility measure. It uses the multiplier to control that scaling. This combined value is plotted on price charts as the SuperTrend line to signal potential buy and sell points. These signals depend on whether prices move above or below that line.
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How Does the Supertrend Indicator Work?
As already mentioned, the Supertrend indicator is a technical analysis tool that plots a line on price charts. This line is calculated using a formula that combines the average of the high and low prices with a multiple of the Average True Range (ATR) volatility measure.
The line can indicate the trend in any timeframe. It can be used for investing, and it is arguably the best indicator for day trading, especially for trend followers. Prices above the Supertrend line indicate an uptrend/buy signal. Conversely, prices below it suggest a downtrend/sell signal.
The indicator’s multiplier allows adjusting sensitivity, while its use of ATR enables adaptation across different assets, timeframes, and market conditions. If you integrate the Supertrend with other technical and fundamental analysis tools, it can aid you in identifying potential entry, exit, and reversal points.
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What Are the Pros and Cons of Using the Supertrend Indicator?
As for all trading tools and indicators, using the Supertrend indicator also has its fair share of advantages and disadvantages. Here are some of the most prominent benefits and drawbacks associated with utilizing the Supertrend strategy:
| Benefits | Drawbacks |
|---|---|
| The Supertrend Indicator is user-friendly, making it accessible to traders with varying levels of experience. | The Supertrend Indicator is a lagging tool, responding to price movements rather than predicting them. This lag could result in delayed entry or exit decisions. |
| The indicator provides dynamic support and resistance levels, adjusting according to market conditions. | The indicator is susceptible to generating false signals, particularly in sideways or choppy markets where trends are unclear. |
| Traders can easily identify the general direction of market trends, facilitating well-informed decisions on when to enter or exit positions. | Selecting the correct multiplier and ATR period can be challenging. An improper sensitivity setting may make the indicator too sensitive or too slow. |
| By incorporating the Average True Range (ATR), the Supertrend Indicator adjusts for volatility, making it adaptable to various market conditions and asset types. | While effective in indicating trend directions, the Supertrend Indicator is not a stand-alone tool. It performs best when used in conjunction with other technical indicators or methods. |
| Clear signals generated by the Supertrend Indicator assist traders in setting appropriate stop-loss levels, aiding in risk management and reducing potential losses. | Primarily a trend-following tool, the Supertrend Indicator may be less effective in range-bound markets or in identifying overbought or oversold conditions. |
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Supertrend Strategy Example: Can Supertrend Be the Best Indicator for Day Trading?
Now that we have clearly described what the Supertrend indicator is and how it works, it is time to provide some visual examples. In this section, we offer a real example from the TradingView charting platform.
Take a look at the 5-minute Ethereum chart below. It is evident that early in the day, the price broke above the supertrend dynamic line, and the supertrend indicators shifted to bullish. You could have entered write after the bullish shifting candle closed.
For the exit, you could have used the supertrend line as a dynamic stop loss level. That is, when the price has dropped below the line, and the Super Trend has shifted bearish, you could have closed the trade (after candle closure).
This example shows how the Supertrend might be one of the best indicators for day trading and, quite simply, the best trend indicator available for free. Moreover, if you want to backtest a trading strategy based on the Supertrend indicator, you can try one of the best Forex backtesting software tools in 2024.
Can You Use Supertrend as a Binary Options Trading Strategy?
As already pointed out, indicators like Supertrend are typically lagging. They are mostly late-to-call trend shifts. As a result, they offer opportunities with low reward/risk ratios but high win rates. Therefore, using Supertrend for binary options trading is not only possible, but it might also be the best indicator for option trading in trending markets. If you are interested in both day trading and binary options, read our article on how to become the best at day trading options.
Yet, make sure to backtest your Supertrend binary options strategy before applying it to live markets. The indicator might only work well on some instruments or timeframes. To do so, click on this link to create a free binary options demo account on Quotex.
What Is The Primary Limitation of the Supertrend Indicator?
The main downside of the SuperTrend indicator is its reliance on trending markets to perform optimally. The indicator works best when asset prices show sustained movements on either the upside or downside. However, in the absence of a well-defined trend, such as during volatile, choppy, or range-bound market conditions, the Supertrend becomes more prone to generating false buy or sell signals.
This presents a significant risk for traders who use the indicator during periods when the markets lack decisiveness. Following inaccurate signals during these non-trending conditions can lead to bad entries or exits. As such, while the Supertrend excels at identifying trends when they exist, its effectiveness is heavily dependent on the market’s trend.
As a result, you must exercise caution when relying solely on this indicator. You can even consider using it with other strategies to limit the risks associated with false signals.
Conclusion
The Supertrend indicator is a valuable technical analysis tool that shines in trending markets by providing clear buy and sell signals. The indicator leverages its ability to adapt to market volatility through the Average True Range. However, its reliance on sustained directional movements means it can generate false signals during non-trending, range-bound conditions.
To mitigate this limitation, traders should integrate the SuperTrend judiciously into a comprehensive trading approach involving other technical indicators, fundamental analysis, and robust risk management strategies. With prudent application within a well-rounded methodology, discipline, and continuous learning, the Supertrend indicator can be a powerful component of a trader’s arsenal for navigating dynamic financial markets.
If you are interested in more static trading systems, check out our guide on mastering the Fibonacci trading strategy.
