SUPER TREND INDICATOR

This adjusted line or indicator is known as the Super trend indicator.If price is trading above the Super Trend line and if the current close remains above that it is bullish.. If the ra

SUPER TREND INDICATOR

In every bar or candle, we have four prices - Open, High, Low, Close.

We have the option to select any price of above to define the trend For example, we may define an uptrend as today’s close being above

Have a look at the images below In the first Image below , the closing price of each candle is connected to the closing price of the next candle.

In the below chart, the “range-price” or the mid-point of each candle is connected.

Do you notice any difference between the two charts? It is obvious that the curve with mid-price is relatively smooth It should be apparent that the range should expand for the average line to move.

Understood how to calculate range price of every bar?

2 Now that the first component is discussed, we will shift focus to the second component - ATR

We have discussed ATR in past threads (ADX and ATR%) ATR (Average True Range) is an indicator developed by J.Welles Wilder His work is used

by many others in developing different studies Our fraternity always remains thankful to him for his amazing contribution.

Remember ATR calculates true range of every bar It measures the

volatility of an instrument over last several period.

For example, if 10-day ATR of Reliance is 40 points, the average range of Reliance price over last 10 candles is 40 points, right?

Trend even if bullish, volatility can interrupt and make it difficult for us to follow it To be able to read trend clearly, we need to discount the

3 Let us now study the third Component - Multiplier

1- ATR is not sufficient as volatility can expand and the indicator line can turn volatile To handle this, we can multiply ATR value by a constant Let

us multiply it by 3 and place a line at 3x of ATR value.

So, if 1-ATR is 40 points, 3-ATR is 3 x 40 = 120 points So, the Trend

indicator value will be Range-price minus 3 x ATR value or 1545 – 120 = 1425.

You have to define two variables in the calculation - the Trend & Multiplier Recommended values are 10 and 3 We take a look at the ATR of last 10 bars and multiply it by 3.

Bullish Trend indicator Value = Range price – (3 x ATR)

filter It can also be used a trailing stop-loss mechanism.

But there is a catch here!! What if the trend is up and the volatility

increases too? In such a scenario, the stop-loss can get lower How do we deal with that? If we allow this to happen, the trend indicator line will be very volatile and have little value from practical trading perspective as the stop loss can theoretically move below previous level.

The Solution to this problem is to make this line go flat when volatility rises See below image.

This adjusted line or indicator is known as the Super trend indicator.

If price is trading above the Super Trend line and if the current close remains above that it is bullish If the range price is bullish, super trend line will be rising If recent volatility is high, super trend line will be flat Vice versa if price is trading below Super trend line.

What are we trying to achieve here? Super Trend is a volatility-based trend indicator Remember, super trend line increases when range price is

bullish, and volatility does not expand Similarly, super trend line falls when the range is bearish and the volatility has not expanded In other instances, it remains flat.

A rising line Super Trend line is bullish and a falling line is bearish Flat line indicates either unfavourable close (sideways market) or a volatile phase Trend is bullish as long as price is trading above super trend indicator, and bearish as long as it is trading below the indicator.

The indicator can be useful for identifying trend, or trailing stop-loss etc It considers volatility and goes flat are its important features.

Understood the logic? 10 and 3 are recommended parameters by the creator of the indicator What will happen if I chose multiplier 2 instead of 3? What would it mean? If you can answer that, you have understood the indicator

Super trend is also applicable on Point & Figure and Renko charts.

Super trend on P&F charts

We discussed in last newsletter how ATR is calculated on P&F charts It measureslength of the column

Super trend is indicator is placed 3 ATR from Mid-price of the column

A column represents swing move Recommended parameters are 10, 3 on P&F aswell You can also experiment with 10, 2.

Super Trend on Renko

It is interesting to know ATR calculation on Renko charts

Remember, a closing price of a bullish brick is its high price and a closing price of

a bearish brick is its low price

Below is a calculation of ATR on Renko bricks when price is in uptrend

But below is a method of calculation when brick is reversed.

Vice versa for bearish continuation and reversal bricks

In simple words, ATR is equal to box-size during continuation trend and double of brick-size during reversal

How is it placed from range-price? See below image

Every time we get new brick, we get new super trend parameter If trend is strong, super trend line will be rising, otherwise it will go flat.

In all types of charts, Super trend is most aggressive on Renko charts because of its diagonal nature of bricks Because of diagonal placement of bricks in Renko charts, we need to increase the parameter of Super trend indicator on Renko charts, recommended parameters are 40, 10

When the next price is printed, we drop the first price and the average is calculated for last 5 prices that includes the newly printed price Hence, this is known as a moving average.

In the above example, a new price is printed at 25 We drop the first price that is

10 and calculate the average of last 5 prices The average of the last five prices

is at 18 now

Have a look at the next example below The price remains at 25 but the moving average rises

Why?

Because the first price was dropped from the calculation and the last five or the most recent 5 prices are taken for calculation The second price which is 10 was dropped, and the last or new price of 25 added This is known as a drop-off impact and applicable to all indicators.

You may wonder how different is moving average from super trend

Moving average plots average of price while the supertrend is volatility based average line A 10-day moving average represents average price of last 10 bars

A 10,3 supertrend line would show value based on average volatility of last 10 bars

Did you ever wonder what would it show, if we plot both on the charts?

If

Price above moving average: Bullish

Price above super trend = Bullish

When the price is trading below moving average, but above the super trend, it is highly likely that the super trend will be flat in that scenario Because there is a correction in the short-term as indicated by the price dropping below moving average and with rising volatility against the trend which is reflected by the flat trend in the Supertrend

During strong trends, price tend to stay afloat above or below the super trend line

Let’s amalgamate the moving average indicator with supertrend to develop a new indicator called the MAST MA-for moving average and ST for Supertrend.

We combine both these indicators and plot them together on the chart Default parameters are 10 for Moving average and 10, 3 for Super trend Both the

indicators plotted together creates a band

Band is coloured green when price is above super trend and turns red when price

is below super trend When the price is within the green band, it means price is below the moving average but above the super trend When price is within the red band, it means it is trading above the moving average but below super trend.From a trading perspective, here is what you can do with the MAST indicator:

 When the price is above the MAST band, look for bullish continuation price patterns

 When the price is within the green band, look for bullish reversal patterns

 When the price is below the band, look for bearish continuation patterns

 When the price is within the red band, then look for bearish reversal

patterns

Study both the indicators and you will discover many possibilities from a trading perspective Remember, objective price patterns can help you plan and execute the trades in conjunction with the MAST indicator.

MAST Indicator can be plotted on all charts and above rules are applicable to all types charts

Because of the unique basis of plotting Renko charts (diagonal plotting), I think MAST indicator is a potent force in Renko charts.

As explained earlier, combine objective patterns of each charting method with this indicator

Trade continuation patterns when above bands, reversal patterns when within bands Trade next continuation pattern when MAST indicator cloud becomes narrow

When does the difference between MAST bands becomes narrow? What does it mean? - this you have to think I have explained the logic of these indicators.Spend time on understanding behaviour of indicator You may get ideas from that Trading comes later Purpose of my posts is to promote logical

understanding of indicators and make you think beyond buy-sell nature of indicators