A relatively new indicator to the markets, the Schaff Trend Cycle indicator was developed by Doug Schaff in 2008. The concept of the Schaff Trend Cycle Indicator is based on a trend indicator that is run through a cycle oscillator, creating an effective indicator ideal for entry and exit signals for trading. Doug Schaff, its creator built this indicator based on his over 20 years of experience in the forex markets. The STC was built to improve on the existing MACD to identify market trends.
Quite soon, the Schaff Trend Cycle or STC for short gained popularity with traders due to its simplicity and high level of accuracy. It is learnt that the STC is more accurate than the MACD and also helps in representing forthcoming price movements, quicker than the MACD.
Despite its popularity the Schaff Trend Cycle Indicator is not commonly available by default with most charting packages or trading platforms. Based on your trading platform, an appropriate STC indicator is attached at the end of the article for download.
Constructing the Schaff Trend Cycle
The STC combines an exponential moving average with slow stochastics to display a signal line that oscillates between two levels on a scale of 0 to 100. The STC is ideally used to identify peaks and bottoms or cycles within a larger underlying trend. This makes for potential low risk, high probability trading entry.
The key levels on the STC scale are 25 and 75 lines, marking a move from overbought to oversold market conditions. Therefore, when the STC turns up from the 25 line, the market is considered to turn bullish, while the STC line moving from the top cutting through the 75 line denotes a downward move in the market.
When comparing to the MACD, the STC line trends to cross the key levels much ahead of the MACD crosses.
Trading the Schaff Trend Cycle
The Schaff Trend Cycle indicator can be implemented across different time frames, with the settings being adjusted depending on the time period being used. 12, 26 or 23, 50 are the commonly used Schaff Trend Cycle settings. The cycles can also be tweaked and common settings include 10 and 22. However, it is up to the trader to tweak the indicator to find the right settings to fit their trading system.
As always, using the cycle alone does not help much. Due to the faster nature of the Schaff Trend Cycle, when using on lower time frames, quite often this indicator signals potential changes in the cycle, only to revert back to its it previous state. Ideally however, because the STC is used to represent cycles in the trend, it can be used along with a trend indicator such as Moving averages in order to enter or exit positions. Bear in mind that the STC only shows the cycles and thus represents both retracements as well as reversals within a trend. One of the best ways to use the STC is alongside Fibonacci Retracements in order to identify potential entry or target points.