Schaff Trend Cycle indicator is a cyclical oscillator. This indicator is based on the assumption that currency trends accelerate and slow down in a cyclical pattern. Doug Schaff developed The Schaff Trend Cycle indicator in 2008. This indicator is the product of the moving average convergence/divergence (MACD) which is popular as a trend indicator. But this MACD is also notorious for lagging due to its slow responsive signal line. The STC indicator is relevance as an early warning sign to detect currency trends which gives improved signal line.
So, this is a modified MACD line that runs through a modified stochastic algorithm as well as smoothed with Wilders’ smoothing to measure the final Schaff Trend Cycle (STC) indicator. The main purpose is to determine the direction, in which a trend cycle is moving along with possible peaks and bottoms within this cycle.
What is the Formula of the Schaff Trend Cycle?
First of all, the 23-period and the 50-period EMA and the MACD values are calculated:
EMA1 = EMA (Close, Short Length);
EMA2 = EMA (Close, Long Length);
MACD = EMA1 – EMA2.
Secondly, the 10-period Stochastic from the MACD values is calculated:
%K (MACD) = %KV (MACD, 10);
%D (MACD) = %DV (MACD, 10);
Schaff = 100 x (MACD – %K (MACD)) / (%D (MACD) – %K (MACD)).
How to Apply the Schaff Trend Cycle Indicator?
If traders want to know more about and also use the Schaff Trend Cycle Indicator, then they can find it in the STUDIES section of Zerodha Kite and it can also find out to the Kite Mobile App. The Field is Close you can change this. The Period is 10 and you can change this value high and low. The Short Cycle is 23 and the Long Cycle is 50. You cha change Short and Long Cycle’s value high and low. Check the image below to understand how to attach the Schaff Trend Cycle indicator in the HDFC Bank share price chart. You can attach this indicator on to any charts likes daily, weekly, monthly or intraday.
Special Features of the Indicator
- The Schaff Trend Cycle indicator is basically a trend indicator that is run through a cycle oscillator.
- The indicator also creates an effective indicator ideal for entry as well as exit signals for trading. Doug Schaff is the developer of the indicator. This indicator is the outcome of his over 20 years of experience in the forex markets.
- The STC basically developed to improve the existing MACD to identify market trends.
- The Schaff Trend Cycle is very much popular among traders due to its simplicity as well as a high level of accuracy.
- As per the information that the STC is more accurate than the MACD. And it also helps in representing forthcoming price movements, quicker than the MACD.
- The strategy of this indicator is quite simple. The indicator seeks to identify trends that happen in a cycle.
- On any currency pair, the strategy of STC can be used.
- Basically, Buy and sell points are mainly set at 25 levels upward (buy) and 75 levels downward (sell).
How the Indicator Works?
Here, I explain, how to understand its readings. There are two thresholds present, 25 and 75. When the indicator crosses above the 25 lines, an uptrend is observed. When the indicator crosses below the 75 lines, a downtrend begins. Once the indicator is between the 25 and the 75 lines, that means the trend is developing in one of the two directions.
And, if the indicator turns into a straight line (that only occurs in its uppermost and lowermost points). The asset is either overbought when it is above the 75 lines. Oppositely, oversold once below the 25 lines. In both cases, a trend reversal can happen, but there is no exact timeline.
Now, I will discuss how you can avoid the false overbought-oversold signal. Here, I add 50 SMA (moving average) along with the indicator. Let’s have a look at the chart below. As you can see that once the price crosses the moving averages from below and goes above. You can buy the stock at the crossover. Reversely, when the price crosses the MA line from above and goes below, the downtrend is coming. In this way, you can ignore the extra noise of the STC indicator.
You can also note that, although STC was developed mainly for fast currency markets, traders can use it across all markets, just like MACD. You can apply this to intraday charts, like five minutes or one-hour charts, as well as daily, weekly, or monthly all time frames.
While the particular indicator seems to boast higher reliability in comparison to MACD, it has some certain flaws. Like, it can linger in overbought and oversold levels for extended periods of time. Due to this, the indicator is most often used for its specific purpose of following the signal line up and down. And also taking profits when the signal line hits the top or bottom.
Schaff Trend Cycle is a popular oscillator to learn and add to the portfolio of useful indicators. Just remember one thing that STC, just like any other technical indicator, it is not capable of providing accurate signals 100% of the time. Hence, will return false signals from time to time.
However, STC is a leading indicator, which means it sends a signal just before the price move has occurred. It also defines that it lacks the proper accuracy of lagging indicators. And should be used in conjunction with other technical analysis indicators.