A very common problem with the intraday traders is that which indicators work well for the intraday trades. Being an intraday trader, chances are that you use technical analysis to identify trades based on different parameters.
However, the first indicator which comes to our mind for intraday trading is Supertrend due to its simplicity. A ‘Supertrend’ indicator can give you precise buy or sell signal in a trending market.
You can watch the video below to get a better idea of the concept and use of Supertrend indicator:
A Supertrend is a trend following indicator similar to moving averages. It is plotted on price and the current trend can simply be determined by its placement vis-a-vis price. It is a very simple indicator and constructed with the help of just two parameters- period and multiplier.
When we construct Supertrend indicator, the default parameters are 10 for Average True Range (ATR) and 3 for its multiplier. The average true range (ATR) plays a key role in ‘Supertrend’ as the indicator uses ATR to compute its value and it signals the degree of price volatility
How to identify buy and sell signal?
Supertrend being a trending indicator works beautifully in trending markets (both uptrends and downtrends). The buy-sell signal can easily be identified when the indicator flips over the closing price. A buy signal is generated when the Supertrend closes below the price and the color changes to green. On the other hand, a sell signal is made when the Supertrend closes above the price and the color of Supertrend turns red. You may do NSE Academy Certified Technical Analysis Course to learn Technical analysis from very scratch and also to learn various strategies to trade in the market.
There’s no technical indicator which can be 100% accurate and so is Supertrend also. It also generates false signals in the sideways market, though it gives lesser false signals as compared to other indicators. So you can combine Supertrend with other indicators to get better trading signals.
Trading strategy using Supertrend and moving average crossover
This strategy basically comprises of Supertrend and 5-20 EMA crossover. When the Supertrend turns green (i.e. Supertrend is below the price) and 5 EMA is above 20 EMA, a buy signal is generated. Similarly, when the Supertrend turns red (i.e. Supertrend is above the price) and 20 EMA is above 5 EMA, a sell signal is generated.
The below is the chart of Nifty. The buy signals are shown with the help of green arrows and the sell signal is shown with the help of red arrows. As you can see in the chart that you can really catch big moves based on this strategy and keep trailing your stop loss with the help of Supertrend to protect your profits.
A Supertrend indicator can be used on equities, forex, or futures on various time frame including hourly, daily, weekly etc. However, Supertrend needs to be used in conjunction with other indicators like RSI, Parabolic SAR, MACD, etc to receive filtered signals.
Moreover, Supertrend also works as a trailing stop-loss for the existing trades and acts as a strong support or resistance.