Supertrend Indicator: How to Use It for Intraday Trading?

Intraday trading is a fast-paced approach that requires constant monitoring of market movements to identify potential trading opportunities. Fortunately, with the right tools and indicators, you can make day trading easier and less demanding. One such tool you can use is the Supertrend Indicator. 

The Supertrend indicator is a useful technical analysis tool that can help you identify the direction of a trend. It can also generate buy and sell signals, which you can use to plan your trades accordingly. 

Here is everything you need to know about this indicator, how it is calculated, the various advantages it offers, and how to use it to plan your intraday trades. 

What is the Supertrend Indicator? 

The Supertrend Indicator is a trend-following indicator that combines aspects of two widely used technical indicators: the Average True Range (ATR) and the Exponential Moving Average (EMA). 

The ATR measures market volatility, whereas the EMA helps smooth out price data and identify the direction of the trend. By combining these two indicators, the Supertrend Indicator provides you with a visual representation of the current trend as well as potential buy and sell signals. 

How is the Supertrend Indicator Calculated? 

The Supertrend indicator uses the following mathematical formula: 

Supertrend = [(Highest Price + Lowest Price) ÷ 2 + (Multiplier) x (Average True Range)] 

Here, the highest price, the lowest price, and the Average True Range pertain to the time frame you have selected for the asset. The multiplier, meanwhile, represents a constant whole number that you can choose from. Depending on the number you select, the indicator will be more or less sensitive to price movements. 

The default Supertrend settings for intraday trading that most traders use are 10 and 3, with 10 representing the ATR length and 3 representing the multiplier constant. That said, the indicator is versatile enough to be used with almost any multiplier and time frame of your choice.          

Advantages of the Supertrend Indicator 

As a trader, you need to know the different benefits of the Supertrend indicator. Here’s a quick overview of some of its key advantages:

• Simple and Easy to Interpret 

The technical indicator uses visual cues to help you identify the prevailing trend easily, making it a simple and easy-to-use tool for both new and experienced traders. 

• Useful for Trend Confirmations

In addition to identifying trends, the Supertrend indicator can also help you confirm trend directions when used with other technical indicators like the Relative Strength Index (RSI). 

• High Level of Adjustability  

The indicator is versatile and can be adapted to work in different time frames. Additionally, you can also increase or decrease its sensitivity by changing the multiplier factor. 

How Does the Supertrend Indicator Work? 

The Supertrend indicator examines the relationship between the EMA and the ATR of an asset over the selected time frame to generate buy and sell signals. 

If the current price of an asset is above the calculated Supertrend value, the indicator generates a buy signal. On the other hand, if the current price of an asset is below the calculated Supertrend value, the indicator generates a sell signal. 

Additionally, the indicator also displays the current trend using different coloured lines — red for downtrends and green for uptrends — making it easier to spot the trend direction.  

How to Use the Supertrend Indicator for Intraday Trading?  

The Supertrend indicator can be a valuable tool for intraday trading. Here is how you can use the indicator as part of your strategy.

• Step 1: Identify the Trend 

The first step is to determine the prevailing trend direction for the asset. To do that, you need to set the ideal time frame. Generally, most traders opt for a 10-minute time frame. However, you could choose a shorter or longer time frame as well. Once the time frame is set, look for a clear uptrend or downtrend on the Supertrend indicator. Bearish trends are usually represented as a red-coloured line moving downward on the price chart, whereas bullish trends are represented as a green-coloured line moving upward on the price chart.

• Step 2: Set the Multiplier Factor 

Once you have determined the trend, the next step is to set the multiplier factor to suit your trading style and risk tolerance level. Many traders claim that the Supertrend indicator’s best settings for intraday trading are a multiplier factor of 3. However, depending on your strategy and style, you could opt for a lower or higher factor. 

Opting for a higher factor value will make the indicator more sensitive to price changes, generating more frequent signals, whereas choosing a lower factor will make it less sensitive, generating fewer signals.  

• Step 3: Take Up a Position 

The Supertrend indicator will start generating trading signals once the multiplier factor is set. A buy signal is generated when the price crosses above the Supertrend value. At this point, you could consider entering a long position in the asset. 

Conversely, a sell signal is generated when the price crosses below the Supertrend value. In this case, you could consider entering into a short position in the asset.

• Step 4: Set Appropriate Risk Management Measures    

The financial markets can be unpredictable and may not move in the direction you expect. As a trader, you need to be prepared for adverse market movements and ensure they do not lead to significant losses. 

The best way to protect yourself from the negative impact of unexpected market movements is to implement appropriate risk management measures, such as setting stop-loss and take-profit orders. Remember to consider your risk tolerance level and trading goals when setting stop-loss and take-profit points. 

• Step 5: Monitor and Make Adjustments 

Since you are trading on an intraday basis, you need to monitor the price action of the asset along with the Supertrend indicator continuously. This way, you can easily spot changes in trend direction and exit your position promptly before the trend reverses. Also, it is advisable to adjust your stop-loss and take-profit points periodically to ensure that they are in line with the changes in the trend direction. 

Conclusion

The Supertrend indicator is a powerful tool that you can use for intraday trading. With it, you can quickly identify the trend of the asset and use the signals it generates to take up a long or short position. 

Now, as with any technical indicator, relying solely on the Supertrend to base your trading decisions is not advisable. Instead, it is recommended to combine the indicator with other indicators and technical analysis tools. This way, you can reduce the chances of false or weak trading signals.

On the Research 360 Platform of Motilal Oswal, you can find a host of different technical indicators, ranging from moving averages and the Relative Strength Index (RSI) to the Average Directional Index (ADX) and pivot points. You can use these technical indicators available on the platform as a supplement to the Supertrend indicator to enhance its accuracy and make effective trading decisions.