Many intraday traders ask us what indicator works best for them, and we’ve found that Supertrend is a popular choice. In this post, we show how to use Supertrend and compare it to other techniques discussed earlier in this blog like the Relative Strength Index and Moving Averages crossover.
What is Supertrend Indicator?
Supertrend is an easy-to-use indicator. When Supertrend flips over the closing price, a Buy signal is generated. And when Supertrend closes below the closing price, a Sell signal is generated.
A supertrend is a trending indicator that works well in trending markets (i.e., in uptrends and downtrends). It’s not perfect, but it gives fewer false signals than other indicators, so if you are an intraday trader who wants to use indicators as part of your trading strategy, you should definitely consider using Supertrend as one of your tools.
The Supertrend Indicator Formula
The supertrend is constructed with two parameters. The commonly used ones are 10 and 3. If you want Supertrend to react more rapidly to price changes, reduce the second parameter. However, this may generate more false signals than you want, so it is better to keep the default parameters.
What’s the difference between Supertrend Trading Strategy and “RSI with EMA Crossover” strategy?
The following chart shows Supertrend in the upper area and RSI and EMA crossover in the bottom area. Supertrend can capture short trends perfectly. An RSI with an EMA crossover strategy would not have given us any signals (we need the RSI to cross above the EMA, and then we need it to remain above it for a few candles). However, Supertrend not only does this, but also gives fewer false signals in sideways trends compared to even EMA crossovers. Supertrend can be a good indicator for intraday traders, but you must always be aware that it may give false signals in sideways trends. Our “Basics of Technical Analysis” webinar gives you the tools to make informed decisions about using indicators like Supertrend in your trading.