Intraday traders use technical indicators to trade to make profits. They employ calculations such as moving averages and Fibonacci Retracement, stochastic oscillator or Bollinger bands. Olivier Seban's super-trend indicator has proven to be a popular choice for investors who want to spot trades.
It is the direction of price movements in a market, which is not necessarily following a particular path, as the name implies. Investors can see the current trend in stock price charts. It is indicated in red for prices that have fallen and in green for those that have increased.
Below is a super-trend indicator plotted to the BSE Sensex price chart
Two fundamental dynamic values are required to create a super-trend indicator: multiplier and period. Before we go into the details, let's first understand what ATR is. ATR, which depresses the price range for a security at a given time, is another indicator of market volatility.
True-range indicators are the highest of these values: current high minus current lowest, absolute value (intrinsic) of the previous high minus previous close, and absolute value of current low minus prior close.
The ATR can be calculated by first finding the TR series and then dividing the above with the number period represented by n.
This is what it looks like when you add the above information to the formula for ATR.
TR=Max [(currently high-current low), Abs (current high-previous close), Abs (current low-previous close), TR=Max]
TRiis a true range
N is the number or periods of trading days.
This formula helps us understand the mechanism behind the indicator. On most trading terminals you only need to check the super-trend indicator, and select the values for the Periods (ATR number days) and multiplier. A multiplier is the value that multiplies ATR. Traders typically use ten periods and a multiplier value of 3. A shorter value of n may bring up more signals, and allow traders to be more responsive to price changes. Longer values of n will help to filter out the noise from daily price movements, so there will be less signals to take action on.
To indicate a buy or a sell, a super-trend indicator is plotted above or below the closing prices. The indicator's colour changes depending on whether you should buy.
The indicator turns green if the super-trend indicator falls below the closing price. This signals an entry point, or points to purchase. If the super-trend closes higher, the indicator will show a red sell signal.
The crossover point is located at the point when buy signal or sell signal are generated. The point at which buy signal is generated and the indicator turns green, you'll notice that the closing price is higher then the indicator value if you hover the cursor. The closing price of a sell signal will also be higher than the indicator value if the indicator turns red.
Although initially, the super-trend indicator was used primarily by traders in the commodity market, due to its precision, which takes into consideration volatility factor in prices it has become a popular indicator of other securities and asset classes, including futures and foreign currency markets.
The supertrend indicator provides traders with strong support and resistance levels to allow them to trade. It also gives signals to set stop losses.
It works like this: If the buy signal is green, then prices drop towards the indicator. You can enter or trade at this level to enter or go long, which doubles as a support level. The sell signal, which is in red, is on. Price points that are close to or touching the indicator could act as resistance.
Is there a good level at which to set your stop-loss? Stop-loss can also be adjusted below the green line if you are long. If you plan to take a shorter position, you can wait until the prices fall below the red line.
A super-trend indicator can be more useful in markets with clear uptrends or downtrends in prices. This indicator may not be useful when markets move sideways. It could also throw up false signals that can trigger wrong trades. Super-trend can be used with moving averages or MACD (moving average convergence divergence) to provide more effective signals.