The Supertrend is a widely used tool in technical analysis, designed to identify the
direction of the prevailing trend. It is plotted on a price chart and shifts above or
below the price based on the current regime.
How is it calculated?
This indicator relies on two key components: the Average True Range (ATR), which
measures market volatility, and a multiplier that adjusts its sensitivity. The calculation
involves the following steps:
Determine the Basic Upper and Lower Bands:
Upper Band (UB):
UB = (High + Low) / 2 + (Multiplier × ATR)
Lower Band (LB):
LB = (High + Low) / 2 − (Multiplier × ATR)
Calculate the Final Bands:
● Final Upper Band (FUB):
If the price is below the current Upper Band (UB), take the lower value
between the current UB and the previous FUB.
● Final Lower Band (FLB):
If the price is above the current Lower Band (LB), take the higher value
between the current LB and the previous FLB.
Plot the Indicator:
● If the price closes above the FUB, the trend is bullish, and the line is plotted
below the price.
● If the price closes below the FLB, the trend is bearish, and the line is plotted
above the price.
Example Calculation:
Assume the following data for a stock:
Step 1: Calculate the Basic Bands
Upper Band:
UB = (500 + 480) / 2 + (3 × 10) = ₹500
Lower Band:
LB = (500 + 480) / 2 − (3 × 10) = ₹470
Limitations
● As a trend-following indicator, it lags behind price movements and may not
perform well in sideways or choppy markets.
● It helps traders identify the prevailing market trend and avoid trading against
it.
● The indicator adapts to market volatility, making it effective in different market
conditions.
● The effectiveness depends on the chosen multiplier and ATR period. A higher
multiplier reduces sensitivity but delays signals, while a lower multiplier
increases sensitivity but may lead to more false signals.
Disclaimer: This information is for educational purposes only. Consult a
financial advisor before engaging in such trading activities.
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investment services. Investments in the securities market are subject to market risks. Read all the related documents carefully
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