Introduction to the SuperTrend Indicator
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The SuperTrend indicator is a popular and effective trend following technical indicator which is based on the concept of ATRs as a basis for trends and trend reversals.
What is the SuperTrend Indicator?
One of the ways traders identify trend direction and trend reversals is with the use of the Average True Range (ATR). Trend reversals can be identified based on how price would reverse against a prior trend direction by a multiple of the ATR.
For example, an uptrend could be considered to have reversed if price moves down by more than three times the ATR coming from the high of the uptrend.
The SuperTrend indicator is based on this concept. It is a trend following indicator that plots a line below price action to indicate an uptrend, and below price action to indicate a downtrend, based on the concept of the ATR as a trend reversal indication.
How the SuperTrend Indicator Works?
The SuperTrend indicator computes for the ATR of a tradeable security based on the preset number of periods on the Super Trend indicator inputs. It then multiplies the ATR with the multiplier which is also set on the indicator’s inputs. The result is then used as the distance in which the Super Trend indicator plots a line opposite the direction of the trend coming from the high or low of the trend. This version of the SuperTrend indicator is preset at ten periods of ATR and a multiplier of three.
This SuperTrend indicator plots a lime line below price action whenever the market is in an uptrend, and a red line above price action whenever the market is in a downtrend.
The line shifts and changes color only when price closes on the opposite side of the line indicating a reversal.
How to Use the SuperTrend Indicator for MT4?
The SuperTrend indicator has three main uses.
One is as a trend reversal indicator. The shifting of the SuperTrend line, as well as its color changes, is indicative of a trend reversal based on the concept of the ATR based trend. As such, traders can use this line shifts and color changes as a trend reversal signal and make trade entries based on it.
Another use would be as a trend direction filter. Here, traders would trade exclusively in the direction indicated by the SuperTrend indicator.
This indicator can also be used as a stop loss basis. Traders can place and trail the stop loss behind the SuperTrend line knowing that the trend is considered to have reversed if price closes on the opposite side of the line.
Buy Trade Setup
When to Enter?
Price should be above the lime SuperTrend line. Wait for price to retrace near the SuperTrend line. Enter a buy order as soon as a bullish candlestick pattern form.
Set the stop loss below the SuperTrend line.
When to Exit?
Trail the stop loss below the SuperTrend line until stopped out in profit.
Sell Trade Setup
When to Enter?
Price should be below the red SuperTrend line. Wait for price to retrace near the SuperTrend line. Enter a sell order as soon as a bearish candlestick pattern form.
Set the stop loss above the SuperTrend line.
When to Exit?
Trail the stop loss above the SuperTrend line until stopped out in profit.
The SuperTrend indicator is an effective tool for identifying and confirming trending markets and which traders can use for their trade decisions.