Know What is Super Trend Indicator: How Does it Work | Espresso

Super Trend Indicator: How Does It Work?

The stock market is a fascinating and ever-changing universe with indicators and trends galore, churning out information akin to a cup brimming with tea. Amidst the tsunami of information and expert advice, particularly with reference to intraday trading, it is easy to be overwhelmed.

 

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How do you decide which trends to follow, which indicators to trust, and which charts to rely upon? The answer to all these questions can be found in the application of a super-trend indicator.

What is a Super-Trend Indicator?

A super-trend indicator is an indicator that follows the price trends of a particular stock and sends out clear buy and sell signals for traders. By shedding light on the direction in which the market for a stock is moving, it helps traders determine their strategies in day trading.

The Components of a Super-Trend Indicator

A super-trend indicator is composed of two main components, namely a period and a multiplier. These elements have been discussed below.

  1. Period (n): Period (n) is the number of trading days whose Average True Range (ATR) for a stock is used in a super-trend indicator. A stock's ATR provides an insight into the volatility of its price and is computed as an average of the true range indicator values of the stock for a given period. In a super-trend indicator formula, usually ATR for a period of 10 days is used.
  2. Multiplier: A multiplier is a value with which the ATR for a stock is multiplied to establish a super-trend strategy. The most commonly used multiplier is 3.

How a Super-Trend Indicator Generates Buy and Sell Signals

A super-trend indicator is placed on a trading chart either above or below the closing price of a stock. The position of the super trend with respect to the closing price is the marker for the generation of buy or sell signals.

  1. When to buy a stock based on a super-trend indicator: In the event of a stock's closing price being higher than its super-trend indicator, the latter would be plotted below the closing price line and marked in green. This represents a signal to enter the market for that stock by buying it. Therefore, if the super-trend indicator for a particular stock is green, you can take it as a clue to buy the stock.
  2. When to sell a stock based on a super-trend indicator: If the super-trend indicator for a stock is above its closing price, the indicator would be marked in red, reflecting a signal to sell the stock. Therefore, if you see the super-trend indicator for a stock rising above its closing price, you can interpret it as a signal to sell the stock.

A super-trend indicator is versatile and can be plotted for multiple time frames. However, using super trends that reflect an extremely brief time period is not advisable. Ideally, you should use a super-trend indicator for at least a 15-minute time frame.

In intraday trading online, super-trend indicators find high application, guiding traders in deciding their trade positions. Since intraday trading is a set of several time frames, you can apply a super-trend indicator to determine when to enter or exit the market for a particular stock, provided there is a clear and discernible trend.
Also Read: Scalping Trading Strategies

Where You Should Apply Stop Loss

If you are using the buy and sell signals generated by a super-trend indicator, it is advisable to apply a stop loss when the price is just below the green line of the indicator.

Pros and Cons of Super-Trend Indicator in Intraday Trading

Pros of a super-trend indicator

Cons of a super-trend indicator

Highly useful to generate buy and sell signals in trending markets

Does not have much application in a market that is not clearly trending in a specific direction

Helpful in the decision-making during intraday trading

Not comprehensive in nature; works best in combination with other tools

Easy to interpret, understand, and apply

Generates inaccurate signals if a market is moving sideways

In Conclusion

A super-trend indicator is an easy to understand and useful tool that has high application in stock markets, particularly in intraday trading. However, its application is limited to markets that are clearly trending in a direction. When used in conjunction with the other significant tools of technical analysis, a super-trend indicator can help you determine a profitable trading strategy.

 

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Frequently Asked Questions

As is the case with all the tools of trend analysis, a super-trend indicator is not completely accurate. It uses specific data points plotted on a precise formula to send out buy and sell signals. However, they are mere signals and need not be 100 per cent accurate. It is worth noting here that if a market is moving sideways, a super-trend indicator may generate false signals owing to the absence of clear trends.

Although you can use a super-trend indicator for different values of period (n) and multiplier, a setting of 10 for the former and 3 for the latter is widely used in stock trading.

If you wish to apply a super-trend indicator to make decisions in intraday trading, you can check the super-trend indicator for a particular stock for an interval of 15 to 20 minutes or higher and discern the buy and sell signals.