Mastering the Supertrend Indicator for Intraday Trading

intraday trading
.18 Sep 2023
author avatar image Chad Smith

Table of Contents

Engaging in intraday trading necessitates a keen understanding of its dynamics, the aptitude to predict market tendencies, and the expertise to develop fitting strategies. One such technique involves the utilisation of the Supertrend indicator—a powerful tool that can significantly enhance one’s short-term trading experience. This exposition delves into the depths of acquiring a comprehensive grasp of intraday trading, mastering the Supertrend indicator’s principles, setting it up in one’s trading platform, developing a beneficial trading strategy, and practising with demo trades before immersing in actual intraday trading.

Understanding Intraday Trading

Understanding Intraday Trading

Intraday trading, also known as day trading, involves buying and selling securities within a single market day. Unlike regular trading where a trader holds on to stocks for a longer duration, here transactions occur in a short time. Thus, it needs constant attention as any rapid turns in the market have immediate effects on your trade.

The primary rationale behind intraday trading is to profit from short term price fluctuations. Traders bet on the price variations of securities to make profits. However, it’s crucial to realise that it entails more risk compared to regular stock investing.

Using the Supertrend Indicator

The Supertrend indicator is an excellent tool often employed for intraday trading. It uses a line on a price chart to illustrate the direction of a trend. This simple, yet effective, technical tool helps capture the short term movements in the market accurately. It generates buy and sell signals based on price actions, making it comparatively easy for traders to decide when to enter or exit a trade.

When plotting the Supertrend indicator on a chart, if the price is above the Supertrend line, it indicates an upward trend in the market, and it is a good time to buy. Conversely, if the price is below the Supertrend line, it signifies a downward trend in the market and, hence, a good time to sell.

Strategies for Supertrend Intraday Trading

A commonly used strategy involves combining the Supertrend indicator with other indicators like Relative Strength Index (RSI), Moving Averages, or Bollinger Bands to get a more accurate prediction.

For instance, combining Supertrend with RSI can allow you to validate the trend direction indicated by the Supertrend line. If the Supertrend line is below the current price, indicating a bullish trend, and the RSI is above 70, confirming an overbought condition, this might not be the best time to buy. Similarly, if the Supertrend line is above the current price, suggesting a bearish market, and the RSI is under 30, indicating an oversold condition, this might not be an ideal time to sell.

Intraday traders can use the Supertrend indicator in various ways to devise their trading strategies. But, like with any trading strategy, ensure to set a stop loss, which is a pre-determined level at which a trader will exit a losing trade, to limit the potential loss on each trade. Bear in mind, being successful in intraday trading requires good market knowledge, quick decision-making and sound strategies.

Image depicting intraday trading with arrows pointing up and down to represent buying and selling

Fundamentals of Supertrend Indicator

Understanding the Supertrend Indicator

The Supertrend Indicator, born out of ‘Atr’ and average price value, is a technical trend trading indicator that calculates the average of a price trend. The average price value is calculated for the given period, and ‘ATR’ facilitates the volatility factor. Essentially, it is a line that represents current market trends and is useful for the identification of the bullish or bearish market trend.

How the Supertrend Indicator Works

The Supertrend Indicator is plotted on the price chart of the stock or market that one is trading. Its formulations consider the average true range (ATR), giving the indicator volatility-based exits. When the price is above this line, the trend is considered bullish, pointing to buy signals. Conversely, when the price is below the line, a bearish trend is signified, indicating sell signals. Furthermore, this indicator can also highlight price reversals when the Supertrend line shifts.

Calculating the Supertrend Indicator

To calculate Supertrend, you will need to understand the underlying formulas. The first step is to calculate the basic upper band (UB), which is the (High+(Multiplier*ATR)). The basic lower band (LB) is (Low-(Multiplier*ATR)). The final upper band is the previous final upper band if the basic upper band is less than the previous final upper band and if the closing price is more than the previous final upper band. Similarly, the final lower band is the previous final lower band if the basic lower band is more than the previous final lower band and if the closing price is less than the previous final lower band. The final Supertrend indicator is the final upper band when the closing price crosses from above to below the final upper band, and the final lower band when the closing price crosses from below to above the final lower band.

Benefits of the Supertrend Indicator

One of the main benefits of the Supertrend Indicator is its simplicity. It uses only three parameters: period, Multiplier, and ATR, making it user friendly. Its ease of interpretation makes it suitable for beginners and professional traders alike. When it is on the price chart, it is easy to identify bullish or bearish trends, making potential buying or selling decisions more straightforward.

Furthermore, the Supertrend indicator can alert traders to volatility in the market. The ATR component of the Supertrend calculation helps to gauge price volatility and can guide traders on risk management.

Limitations of the Supertrend Indicator

Despite its benefits, the Supertrend indicator does have limitations. It works best in trending markets and can give misleading signals in a sideways or ranging market. This could potentially lead to false alarms and losses. Another limitation is that the Supertrend Indicator only signals an exit, but doesn’t provide re-entry points, which might have traders miss out on potential trading opportunities. It is therefore advisable to use the Supertrend indicator alongside other technical indicators to confirm signals before taking positions.

While using it, traders should also be mindful of the market’s volatility. Although the indicator measures price volatility through the ATR calculation, it is still crucial for traders to understand market conditions themselves, to ensure sound application of the indicator.

A chart showing the Supertrend Indicator plotted on a stock or market price chart, demonstrating bullish and bearish trends.

Setting up the Supertrend Indicator

Setting up the Supertrend Indicator

To begin with, you must have a charting platform which allows for the use of custom indicators. Most trading platforms, such as MetaTrader 4, TradingView, or Zerodha Kite, have this functionality. If you’re unsure, check the specifics of your chosen platform.

The first step is to open the chart of the stock or asset that you are interested in. Most charting platforms will allow you to easily do this by entering the symbol or name of the stock.

Next, navigate to the ‘Indicators’ or ‘Studies’ section of the platform. Here, locate the ‘Supertrend’ indicator. In MetaTrader, for example, you may need to download the Supertrend Indicator plugin first, but it comes pre-installed on platforms like TradingView and Zerodha Kite.

Once you find the Supertrend Indicator, add it to your charts. This usually involves clicking a ‘+’ button or dragging and dropping the indicator onto the chart. You should instantly see the red and green bands appear on your chart, representing the Supertrend indicator line.

Understanding Parameter Settings

The primary parameters that you will need to adjust for the Supertrend indicator are the ‘Multiplier’ and ‘Period’. These define the sensitivity and look back period of the indicator, respectively.

The ‘Multiplier’ parameter is used to adjust the distance between the price and the Supertrend line. A higher multiplier will lead to a wider distance between the price and the Supertrend line, making the indicator less sensitive to price changes. Conversely, a lower multiplier will reduce the distance, making the Supertrend more responsive to price movements.

The ‘Period’ parameter refers to the number of previous bars or candles that the indicator uses to calculate its value. The higher this value, the more the Supertrend indicator smoothens out, and vice versa.

The standard settings for the Supertrend Indicator are usually a period of 7 and a multiplier of 3, but you can adjust these as necessary to align with your trading style.

Customising the Supertrend

Once the Supertrend Indicator is added to your chart, you should be able to customise it further by altering its visual characteristics such as line thickness and colour.

You can usually do this by right-clicking on the Supertrend line or through the settings/prefs menu in the ‘Indicators’ or ‘Studies’ section. The exact process may differ slightly depending on your charting platform.

Having the line set to a thickness and colour that stands out to you can greatly assist in reading and understanding the data it’s presenting as quickly as possible.

Remember to Use the Supertrend Indicator Responsibly

The Supertrend Indicator is best used in conjunction with other trading strategies and should not be used as a standalone tool for making trading decisions. Test out different parameter settings and use it in a demo trading account first to gain confidence and understand the behavior of this indicator.

A person setting up the Supertrend Indicator on a chart on a trading platform

Creating a Trading Strategy using Supertrend Indicator

Understanding the Supertrend Indicator

The Supertrend Indicator is a tool used in technical analysis that generates buy and sell signals, making it a popular tool for intraday traders. It’s based on the average true range (ATR), and will plot a line on the price chart that dynamically changes colour as the price alters. The tool identifies the trend – a green line shows an uptrend and a red line shows a downtrend.

Creating a Strategy with Supertrend Indicator

To create a trading strategy using this tool, it’s important to understand its signals. Buy signals are generated when the Supertrend line turns green, indicating an uptrend, and sell signals are generated when it turns red, signifying a downturn. Meanwhile, the price above the Supertrend line indicates bullish conditions, and the price below the Supertrend line indicates bearish conditions.

Establishing Stop-loss Points

With the Supertrend Indicator, you can easily setup efficient stop-loss points. When you’ve purchased a security and the Supertrend flips from green to red, it’s a sign to sell and vice versa. This feature allows the trader to limit their potential loss without limiting potential gains.

Time-frame Selection

The Supertrend tool can be used with any time-frame but given it involves intraday trading, it’s commonly used with a 15-minute chart. Remember to always align your chosen time-frame with your trading goals and risk tolerance.

Combining Supertrend Indicator with Other Technical Indicators

For better accuracy, it’s helpful to use the Supertrend Indicator in conjunction with other technical indicators. For example, combining it with Moving Average Convergence Divergence (MACD) can lead to a stronger trading strategy. MACD will typically help you determine entry points, while Supertrend determines trend direction. When both indicators give a buy signal, the trader can go long, while a sell signal from both indicators calls for short positions. By doing this, false signals can be minimised, and the accuracy of your strategy can be significantly improved.

Maintenance of Your Trading Strategy

It is always necessary to continually review and update your trading strategy. The markets are always changing, and strategies that may have worked well at one time might not work as well under different market conditions. By adapting and refining your approach, you can keep your trades in line with the latest market trends and behaviours.

Remember, while the Supertrend Indicator can make your intraday trading strategy more efficient, no tool guarantees profit. Take the signals provided by Supertrend as a guide and make sophisticated and well-informed decisions based on your study and comprehension of the market.

An image showing a chart with the Supertrend Indicator plotted on it, demonstrating its dynamic color change and its ability to identify uptrends and downtrends in the market.

Practicising with Demo Trades

Understanding the Supertrend Indicator

The first step in using the supertrend indicator for intraday trading is understanding what it is. The Supertrend indicator is essentially a trend-following indicator, which works on the principles of price action or volatility. It gives you clear buy or sell signals in the market, making it a rather popular tool for intraday, as well as long-term traders. It primarily uses two parameters, the period and multiplier. The period signifies the number of bars/candles that would be used to calculate the average true range (ATR), while the multiplier denotes the value which the ATR would be multiplied with.

Setting up the Supertrend Indicator

Many trading platforms have the supertrend indicator in-built into their systems. You will need to locate this and add it to your selected chart. Once you’ve selected the Supertrend Indicator, set its parameters. A common setting for intraday trading is a period of 7 and a multiplier of 3, but you can adjust these according to your preferred style of trading.

Interpreting the Supertrend Indicator

The supertrend indicator graphs a line along the price trend, which changes colour based on the direction of the trend. If the line is green, it indicates a bullish trend, meaning you should consider buying. If the line is red, it signals a bearish trend, suggesting that you should consider selling.

Practising with Demo Trades

After you’ve familiarised yourself with the setup and interpretation of the supertrend indicator, it’s time to practise in a risk-free environment. Start by selecting an asset for intraday trading in your demo account. Apply the supertrend indicator and observe how it responds to changes in price.

Use the signals it provides to make your dummy trades – go long (buy) when the indicator turns green and go short (sell) when it turns red. Monitor how your demo trades perform throughout the day in response to these signals. Remember, all strategies don’t work every time, hence it’s important not to get carried away by initial success or get disheartened by initial failures.

Reviewing and Learning

After the market session ends, review your trades and analyse your decisions. See where the indicator helped you make profitable trades and where it didn’t. Assess if any changes in settings or in your interpretation can improve performance.

Remember, practicing with demo trades is crucial because it allows you to experiment, make mistakes, and learn without any real financial risk. Once you’re confident with your understanding of the supertrend indicator and comfortable with your trading strategy, you can consider moving on to actual intraday trading.

A graphical representation of the supertrend indicator demonstrating the changing line colors and their interpretation for buying or selling in intraday trading.

The world of intraday trading, although vast, can be maneuvered through by employing appropriate strategies and implementing effective tools such as the Supertrend indicator. Having now traversed through the various elements of this trading form—from its fundamental understanding to the nitty-gritty of the Supertrend Indicator, its setup, the formulation of a trading strategy with it, and applying all these knowledge in demo trades prior to actual execution—it is safe to assert that you have amassed a wealth of knowledge to empower you as you navigate the waters of intraday trading. Venturing forth, may your trading endeavours be marked with success, sustained learning, and constant evolution, underpinned by the effective application of these discussed strategies.

author avatar image
Chad Smith

Chad Smith is the Director of Research & Analysis here at previously served as an Editor for a number of websites related to finance and trading, where he authored a significant number of published articles about trading and the impact of technology in transforming investing as we know it.Overall, Chad is an active fintech and crypto industry researcher with more than 15 years of trading experience, and you can find him teaching his dog how to trade in his free time.