Supertrend + Stochastic RSI Strategy

An uncomplicated 'loss recovery' strategy (with example) →

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Today in less than 5 minutes:

1) A more insightful version of the RSI indicator
2) A ‘loss recovery’ strategy using Supertrend + a new indicator (with example)
3) 3 stocks for swing trading as per the strategy

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Say hi to Stochastic RSI

Similar to the RSI, there exists another momentum indicator called the stochastic oscillator, that helps in determining trends and predicting reversals.

This oscillator is made up of two lines - the K%, which reflects the actual value of the oscillator, and the D%, which is a 3-day moving average of K%. Here’s how K% is calculated:

C stands for the recent closing price, and H & L stand for the highest & lowest traded prices in the past 14 (default) sessions respectively.

If the stochastics are below 20, (on a scale of 1 to 100), it indicates that the stock is oversold, while stochastics above 80 are considered overbought. An intersection of these two lines is considered to be a signal that a reversal may be in the works.

The ‘stochastic RSI’ is a combination of the RSI and stochastic oscillator, where the oscillator’s values are calculated using the RSI instead of the price of the stock.

We can combine the stochastic RSI with Supertrend, one of our favourite indicators, to get a simple & effective trading strategy, famously called the ‘loss recovery strategy’ by one of our experienced instructors.

Supertrend + Stochastic RSI Strategy

We will use the stochastic RSI to define our entries while ensuring that the trade complies with the Supertrend rule.

First, we will set the Stochastic RSI to the following:

  • RSI Length: 140

  • Stochastic Oscillator Length: 140

  • K%: 30

  • D%: 30

And adjust the Supertrend indicator to:

  • ATR length: 10

  • Factor: 3

These indicators are freely available on TradingView, one of the world’s most popular charting and stock-scanning tools. Discover how to make the most of TradingView here.

Suitable for intraday, swing, and positional timeframes, here’s how a trade can be initiated as per the strategy:

Entry / Long Trade

1) Wait for the smoothened lines of the stochastic RSI to appear below 20.
2) An entry/long trade is triggered when the K% line crosses above the D% line.
3) Make sure that the Supertrend is in the bullish zone, i.e. the Supertrend line is below the candles.
4) The Supertrend line acts as a trailing stop loss for the trade.

Exit / Short Trade

1) Wait for the smoothened lines of the stochastic RSI to appear above 80.
2) An exit/short trade is triggered when the K% line crosses below the D% line.
3) Make sure that the Supertrend is in the bearish zone, i.e. the Supertrend line is above the candles.
4) The Supertrend line acts as a trailing stop loss for the trade.

Because this strategy uses extended periods to calculate indicators, it produces a limited number of signals, but they tend to be accurate, leading to a high success rate.

Read on to see an example where this strategy generated stellar returns, and 3 shortlisted stocks you can enter today as per the strategy’s rules!

Learn Ms. Jyoti Budhia’s way of identifying & profiting from stocks using indicators and oscillators in her comprehensive Technical Analysis Course. Use ‘STOCK10‘ for a 10% discount & get the course for just 359.

This strategy generated 18.7% in one swing!

Below is the chart of RELIANCE on a daily timeframe. An entry was triggered when K% crossed above D% and the Supertrend was bullish. An exit was made when K% crossed below D%.

This swing trade generated an 18.7% return in 133 trading sessions!

RELIANCE (1D)

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Shoot your questions!

Have any doubts about the above strategy or indicators? Or want to learn something else? Hit us up!

Add these 3 stocks to your watchlist

We scanned through some stock charts from the NSE500 family looking for the criteria defined in the above strategy.

And found 3 stocks (as of 31st January 2024) that look bullish, and ripe for entry!

1) CHOLAHLDNG (Daily Timeframe)

A positive crossover of the stochastics is about to occur, while the Supertrend has turned bullish, with a new, steep trend beginning.

2) USHAMART (Daily Timeframe)

A perfect entry as per the strategy, since a positive crossover of the stochastics has occurred, along with a bullish Supertrend indicator.

3) FIVESTAR (Daily Timeframe)

A positive crossover of the stochastics + a bullish Supertrend indicator seen.

Note that none of the above stocks are intended as recommendations. Do your own research before trading/investing.

One thing that stands out clearly from the above examples is that the Supertrend indicator in itself is a good signal for identifying new trends. If you’re interested in mastering the Supertrend indicator for trading in different time frames, you should check out this course taught by Mr. Khagesg Agarwal, a full-time trader having 13+ years of experience.

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