Supertrend indicator: How to analyze the direction of the financial market using Supertrend indicator

Supertrend is a trend following indicator.

Being a trend following indicator, Supertrend indicator was created by Olivier Seban with the main objective of helping traders to know whether the market is trending in an upward or downward direction based on previous high price and previous low price.

Supertrend indicator has red and blue lines.Blue line indicates the upward market direction while red line indicates the downward market direction

Supertrend indicator is based on ATR of the upper and lower supertrend with a multiplier and therefore is calculated using the following formula;

upper supertrend= (high+low)/2+(multiplier*ATR)

lower supertrend=(high+low)/2-(multiplier*ATR)

Supertrend indicator can further be explained as follows;

Since supertrend indicator is based on previous low and previous high price, it therefore follows that when the supertrend indicator rises above the previous high price,the supertrend will turn red thus an indication that the market has gained resistance point thus signaling the trader to close any buy position and open a sell position since the market will start moving downwards.
On the other hand, if the supertrend indicator falls below the previous low price, the supertrend will turn blue thus an indication that the market has gained support thus signaling the trader to close any sell position and open a buy position since the market will start moving upwards. This is indicated as from the candle sticks chart below;

From the candle sticks chart above, the red and the green curve is the supertrend indicator.There is also two points, A and B which represent below lowest price and above highest price. At point A, the market was initially moving downwards.The supertrend indicator then falls below the previous highest high price at point A thus indicating a support point condition at point A. This will signal the trader to close any sell position and open a buy position since the market is starting an upward trend as indicated by the upward arrow.
On the other hand, at point B,the market was initially moving upwards. The supertrend indicator then rises above the previous highest high price at point B, thus indicating a resistance point at point B. This will signal the trader to close any buy position and open a sell position since the market is starting a downward trend as indicated by the downward arrow.

Recommendation: If you are a day trader, just use 1 min, 5 min, 15 min and 30 min timeframe while if you are a swing trader just use 1 hour and above timeframe if you want supertrend indicator to work well for you.

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