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Using SuperTrend and Parabolic SAR for trading and investing
I am not a technicals guy.
I am more of a fundamentals guy than being a technicals.
This does not mean that I can safely ignore Technical Analysis and go by blindly with Fundamental Analysis alone.
Both Fundamental and Technical Analysis are both equally important.
They should be treated like our eyes. Can we use one eye and ignore to use the other?
My personal view is that technicals works for great for intraday and short term / positional investing.
Technicals combined with Fundamentals (combined with lot of luck) can help us make money in the market.
There are several technical methods that help in investing.
But as a person who prefer simple to deduce technical methods, I prefer two particular studies amongst them - SuperTrend and PSAR
These studies (actually markings on charts) are automatically displayed in most charting tools offered by stock brokers.
So everyday, before the start of your trading or investing day, do check these two studies of your stocks and supplement your studies.
How to add SuperTrend and PSAR
Several technical charting tools provide both SuperTrend and PSAR.
Some examples include Zerodha Charts, MoneyControl and Investing.com amongst others.
In Zerodha, for the stock of my preferred company, these are the settings I have put:
1. In the Display menu, change the Chart Style to Heikin Ashi
2. In Studies menu, select SuperTrend. This will add a solid Red / Green color line on the chart.
The parameters the use for the chart are:
- Chart Frequency: Daily
- Supertrend Parameters: Period: 7; Multiplier: 3
3. Now in Studies menu, select Parabolic SAR. This will add a dotted line on the chart. The dotted line appears above or below the candle.
- Parabolic SAR: Minimum AF: 0.02; Maximum AF: 0.2
These are basically two studies that you can find in most charting tools.
Supertrend is a very simple indicator.
The Buy and Sell signal changes as soon as the indicator flips over the closing price.
When the Supertrend closes below the Price, a Buy signal is generated, and when the Supertrend closes above the Price, a Sell signal is generated.
SuperTrend is a trend indicator and requires historic price and volume data to determine the trend.
I generally SIP for the long term.
A good time to start SIPing is when ST and PSAR are in BUY trend.
When either of the trend are in SELL, it means we should pause and take a break.
We need to wait for as long as the trend is in SELL.
When both change the trend to BUY, we can again start accumulating the company.
Going by the market trend is really important in investing.
This helps us not to hurry and put all our money into one go.
As long term investors, we need to be slow and patient all through the process - from making the first invest till exiting the company.
Patience helps build wealth.
Impatient investors either invest in a hurry, exit in a hurry, stop loss in a hurry or book profit early.
Identifying the trend lines from the charts
The solid red color line is the Super Trend which shows the trend of the stock is currently in Sell mode.
The dotted upward trending line is the Parabolic SAR which is in Buy mode.
I will pause when either or both of ST and PSAR are in sell trend.
I will SIP according to my budget rules when both are in buy trend.
Trying to make trend my friend.
SuperTrend as a Support / Resistance level indicator
One good (or bad) thing with SuperTrend is that it can act as a Support and Resistance level indicator.
Here is an example for your better understanding.
Assume the stock is already bearish mode (SuperTrend is bearish red line).
The stock price comes and perhaps touches the SuperTrend line.
However, there are no volumes (check Volume Chart for the candles) to support the price moment.
In such a case, the SuperTrend bullish signal will not be given and the stock is likely retrace and come down in the next few ticks.
Summary: If SuperTrend line is touched but there are no volumes to support move, there will be no change in trend. Hence ST acts as a resistance level indicator.
Parabolic SAR.. a study similar to SuperTrend.
The parabolic SAR is a popular indicator that is mainly used by traders.
It is used to determine the future short-term momentum of a given asset.
A small dot is placed below the price when the trend of the asset is upward, while a dot is placed above the price when the trend is downward.
It is more sensitive and changes direction more quickly than SuperTrend.
Since both process different set of data, we use a combination of both so as to take a decision.
In fact, if you have patience, you can use as many such studies as possible to arrive better decisions to have better success rate with your trades / investments.
Traders can make use of Parabolic SAR alone for their intraday entry and exit.
However, investors need to complement their decisions with both ST and PSAR trend.
Why Heikin Ashi chart type for SuperTrend?
Heikin Ashi chart type takes into account the data from the previous candle as well.
This allows the present candle to be influenced by the ongoing trend so that the trend will progress more fluidly.
We can draw SuperTrend without Heikin Ashi also.
Because SuperTrend is a study specially used to study trends, Heikin Ashi helps in better decision making.
So, Supertrend is more reliable with Heikin Ashi rather than just candlesticks.
- Using Williams %R to determine oversold or overbought situation
- Using Commodity Channel Index to determine strong or weak price action
- Using Average Directional Index to determine trend strength or weakness