Unlocking Market Trends with TradingView’s Supertrend Indicator
Having a reliable indicator that can help you identify trends and potential entry and exit points is crucial. One such tool that has gained popularity among traders is the Supertrend indicator on TradingView. In this article, we’ll delve into the details of the Supertrend indicator, exploring its definition, calculation, interpretation, and practical application.
Understanding the Supertrend Indicator
What is the Supertrend Indicator?
The Supertrend indicator is a technical analysis tool used in financial markets to identify and confirm trends in the price movement of an asset. It accomplishes this by providing a dynamic support and resistance level that adjusts based on market volatility.
The key components of the Supertrend are the Multiplier (Factor) and Period (ATR Length). The multiplier determines the sensitivity of the indicator to changes in volatility. Higher values make the Supertrend less reactive, while lower values make it more responsive to market fluctuations. The period is the number of data points considered to calculate the Average True Range (ATR), which measures volatility.
The indicator generates an upper and lower band, represented as lines on the price chart. The upper band is calculated as the average of the highest and lowest prices of the current period plus the multiplier times the ATR. The lower band is calculated similarly, but subtracting the multiplier times the ATR.
The efficiency of the Supertrend indicator largely depends on the market conditions and the specific asset being traded. This is a Trend-following indicator and, therefore, it tends to perform best in trending markets, where price movements have a clear and sustained direction.
In choppy or sideways markets, the Supertrend may generate more false signals, as it’s designed to capture trends. Therefore, it’s important for traders to be aware of the overall market conditions and consider using additional indicators or analysis techniques to confirm signals, particularly during periods of low volatility.
As it is useful for locating Down or Up trends, The Supertrend indicator can be applied to a wide range of financial assets, including Forex Pairs, Precious metals, and Energies such as the WTI or Brent Oil, but also Stocks, Indices and Crypto Currencies. Traders in the foreign exchange market find the Supertrend useful for identifying trends in currency pairs. It can be applied to various timeframes, from intraday to longer-term positions. It’s commonly used in index trading, helping traders identify trends in broad market indices like the S&P 500 or the Dow Jones Industrial Average.
Efficiency of the Supertrend
The efficiency of the Supertrend indicator largely depends on the market conditions and the specific asset being traded. It tends to perform best in trending markets, where price movements have a clear and sustained direction.
In choppy or sideways markets, the Supertrend may generate more false signals, as it’s designed to capture trends. Therefore, it’s important for traders to be aware of the overall market conditions and consider using additional indicators or analysis techniques to confirm signals, particularly during periods of low volatility.
Calculating the Supertrend
The Supertrend is calculated using two main parameters:
- Multiplier (Factor): This factor determines the sensitivity of the indicator to changes in volatility. Higher values make the indicator less sensitive, and lower values make it more reactive.
- Period (ATR Length): The number of periods used to calculate the Average True Range (ATR), which is a measure of market volatility.
The formula for calculating the Supertrend is as follows:
- Upper Band = (High + Low) / 2 + Multiplier * ATR
- Lower Band = (High + Low) / 2 – Multiplier * ATR
Where:
- High is the highest price of the current period.
- Low is the lowest price of the current period.
- ATR is the Average True Range.
The Supertrend is then represented as a line on the price chart, with the upper and lower bands acting as dynamic support and resistance levels.
Customization
The Supertrend has several inputs that you can adjust to match your trading strategy. Adjusting these settings allows you to make the indicator more or less sensitive to price changes.
For the Supertrend inputs, you can adjust atrLength and multiplier:
- the atrLength setting is the lookback length for the ATR calculation;
- multiplier is what the ATR is multiplied by to offset the bands from price.
Interpreting the Supertrend Indicator
Interpreting the Supertrend is essential for traders seeking to make informed decisions based on its signals. It provides valuable insights into the direction and strength of a market trend.
Bullish Signal
A bullish signal occurs when the price of an asset is above the Supertrend line. This indicates an upward trend in the market. Traders often view this as an opportunity to consider entering a long position or as a confirmation to hold an existing long position.
When the price is above the Supertrend line, it signifies that the trend is favoring buyers. This means that there’s generally more demand for the asset, which is pushing its price higher. It’s important to note that while a bullish signal suggests upward momentum, it doesn’t guarantee uninterrupted gains. Traders should still be cautious and consider other factors before making trading decisions.
Bearish Signal
A bearish signal is generated when the price of an asset is below the Supertrend line. This indicates a downward trend in the market. Traders may interpret this as a potential entry point for short positions or as a confirmation to hold an existing short position.
When the price is below the Supertrend line, it suggests that sellers have the upper hand in the market. There is generally more supply than demand, causing the price to trend downwards. As with bullish signals, bearish signals don’t guarantee continuous declines. Traders should still conduct thorough analysis and consider other indicators or factors.
Trends and Sideways Markets
As we stated at the beginning of the article, it’s crucial to recognize that the Supertrend performs best in trending markets. In a strongly trending market, the Supertrend is more likely to provide reliable signals. However, in sideways or choppy markets with little directional movement, the Supertrend may generate false or less reliable signals. During such periods, it’s advisable for traders to exercise caution and potentially use other indicators or analysis methods for confirmation.
Avoiding Whipsaws
A “whipsaw” is a scenario where the Supertrend generates a signal, but the price quickly reverses, causing the trade to result in a loss. Traders should be aware that whipsaws can occur, especially in volatile or uncertain market conditions. To mitigate this risk, some traders opt to use additional filters or confirmation techniques alongside the Supertrend.
Practical Applications of the Supertrend Indicator
As we said above already, The Supertrend indicator is a versatile tool that can be applied to various financial assets, including currency pairs, commodities like gold, and stock indices like the DJ30 (Dow Jones Industrial Average).
Let’s explore practical applications of the Supertrend indicator with detailed examples for each of these asset classes.
Currency Pairs (Forex)
Scenario: Consider a trader interested in the EUR/USD currency pair. They want to identify a trend for potential profit.
Practical Application:
- The trader adds the Supertrend indicator to their EUR/USD chart.
- They notice that the Supertrend line is currently above the price.
Interpretation: This signals a bullish trend in EUR/USD. The trader can use this information to consider entering a long position or to stay in an existing long trade.
Note: Traders often pair the Supertrend indicator with other Forex-specific indicators like the Moving Average Convergence Divergence (MACD) or Relative Strength Index (RSI) for further confirmation.
Commodities (Gold)
Scenario: An investor is interested in trading gold, a popular commodity known for its volatility.
Practical Application:
- The investor adds the Supertrend indicator to the gold price chart.
- They observe that the Supertrend line is currently above the gold price.
Interpretation: This signals a bullish trend in gold. The investor may use this as a confirmation to maintain their long position in gold or even consider adding to it.
Additional Strategy: Some investors use the Supertrend to time their entries or exits, buying when the price is near the Supertrend line in an uptrend and selling when the price deviates significantly from it.
Stock Indices (DJ30)
Scenario: A day trader is interested in trading the DJ30 index, which represents 30 major U.S. companies.
Practical Application:
- The day trader adds the Supertrend indicator to their DJ30 chart.
- They notice that the Supertrend line is currently below the DJ30 index.
Interpretation: This indicates a bearish trend in the DJ30 index. The day trader might consider this as a signal to initiate a short position or to maintain an existing short trade.
Risk Management: In this scenario, the day trader might also use the Supertrend as a stop-loss level. Placing a stop-loss order just above the Supertrend line can help limit potential losses if the trend reverses.
Combining with Other Indicators
Scenario: A swing trader is analyzing a stock in their portfolio and wants to use multiple indicators for a comprehensive analysis.
Practical Application:
- The swing trader reviews the Supertrend indicator, which currently indicates a bullish trend.
- They also check the Relative Strength Index (RSI), which is below the overbought threshold.
- Additionally, they observe that the Moving Average (MA) crossover has recently occurred with the shorter-term MA crossing above the longer-term MA. It is also similar when MACD is applied.
Interpretation: Combining these indicators, the trader gains confidence in their bullish outlook for the stock. They might consider adding to their position or holding it for further potential gains.
Note: The use of multiple indicators can help traders reduce false signals and increase the probability of successful trades. It’s essential to customize your indicator combination based on your trading style and asset of interest.
Usage with additional indicators
The Supertrend helps you make the right trading decisions. However, there are times when it generates false signals. Therefore, it is best to use the right combination of several indicators. Like any other indicator, Supertrend works best when used with other indicators such as MACD, Parabolic SAR, or RSI.
Incorporating the Supertrend indicator into your trading strategy can provide you with a powerful tool to navigate the financial markets more efficiently. Whether you are trading currency pairs, commodities, or stock indices like the DJ30, the Supertrend’s ability to identify trends and potential entry and exit points can be a valuable asset in your toolkit. At Eightcap, we are committed to providing traders with access to top-notch tools and resources, including TradingView, where you can readily incorporate the Supertrend indicator into your analysis. By combining this versatile indicator with our platform’s features and support, you can make more informed trading decisions and potentially enhance your trading experience. Start harnessing the power of the Supertrend and other advanced tools with Eightcap today to elevate your trading experience.
* The information provided here has been prepared by Eightcap’s team of analysts. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and do not reflect the opinions of Eightcap.
In addition to the disclaimer on our website, the material on this page does not contain a record of our trading prices, or represent an offer or solicitation for a transaction in any financial instrument. Eightcap accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.
Please note that past performance is not a guarantee or prediction of future performance. This communication must not be reproduced or further distributed without prior permission.