SUPERTREND: HOW TO USE SUPERTREND INDICATOR
by HIMANSHU PATIL
We’re often asked by intraday traders as to what indicator works well in intraday and the indicator that comes first in the list is Supertrend. In this post, we see how to use the Supertrend indicator and compare it to various other techniques discussed earlier in this blog like “RSI with EMA crossover” to see its advantages.
Supertrend is a very simple indicator.
The Buy and Sell signal changes as soon as the indicator flips over the closing price (see image below).
When the Supertrend closes below the Price, a Buy signal is generated, and when the Supertrend closes above the Price, a Sell signal is generated.
In Investar this is shown with green and red arrows, so that all you have to do is use the green arrow for Buy and red arrow for Sell.
Supertrend is a trending indicator, and like all trending indicators it works well in trending markets (i.e. in uptrends and downtrends).
There’s nothing perfect in Technical Analysis and so is Supertrend also; as it does give false signals in sideways trends.
However, it does give lesser false signals than a lot of other indicators and hence if you are an intraday trader who wants to use indicators as part of your trading strategy, you definitely want to use Supertrend in your trading arsenal.
Supertrend is constructed with two parameters, and the commonly used ones are 10 and 3.
The 2nd parameter can be reduced if you want Supertrend to react more rapidly to price changes but it may end up generating more false signals, so the default parameters work just fine.
To compare the performance of Supertrend with “RSI with EMA crossover”, the screenshot below shows Supertrend on a recent Nifty chart in the upper area and RSI and EMA crossover in the bottom area. As seen in the chart, the Supertrend is able to capture the short intraday trends perfectly. While an RSI with EMA crossover strategy would not have given us any signals (remember, we need to have an RSI buy signal followed by EMA crossover within a few candles), the Supertrend not only is able to capture the uptrends and downtrends properly but also gives lesser false signals in the sideways trend compared to even EMA crossovers (as indicated in the screenshot).
It’s not to say that Supertrend is perfect, but even in sideways trends it manages to give lesser or no false signals at times and that is what makes it a very good choice as an indicator, especially for intraday trading.
As a trader, one has to still be aware though, that it can still give false signals if the trend is sideways and ignore signals if the trend appears to be sideways.
Trend Analysis is an important part of any decision-making and in this Supertrend is no exception.Comparison of Supertrend with “RSI with EMA Crossover” strategy
You brought my late cousin, Whi