What Is The Schaff Trend Cycle & How To Trade With It

The Schaff Trend Cycle (STC) is an oscillator indicator that you can use to identify negative and positive trends, pinpoint entry and exit points, and provides buy and sell signals. What is unique about it, and why you should use it when trading? First, it’s straightforward to understand. The Schaff Trend Cycle is your most typical oscillator, rounded off with a component of cycle. Secondly, it was developed as an improved version of MACD (at least according to its author). Please read the entire article to understand how to trade with the Schaff trend cycle and add it to your trading strategy collection.

What is the Schaff Trend Cycle?

As mentioned earlier, the Schaff trend cycle works similarly to the MACD. It also includes the concept of cycles critical to global financial markets to help identify positive and negative trends.

Here’s how to understand the indicator.

There are two thresholds in the indicator, 25 and 75. When the indicator crosses the 25 lines, an upward trend can be observed. If the indicator falls below the 75 lines, a downward trend is assumed. If the indicator is between lines 25 and 75, the trend will move in either direction.

Moreover, the value of indicator line above the 75 is considered overbought while below the 25 is deemed to be oversold. A trend reversal can be expected in both cases, but no exact time frame can be estimated.

Schaff Trend Cycle on chart
Schaff Trend Cycle on chart

How to set up Schaff Trend Cycle indicator?

If you are working with Metatrader, setting up the Schaff trend cycle indicator is easy. You need to do the following:

  1. Download the indicator and go to the MQL folder of your trading terminal. Then choose the “indicators” folder and place the indicator there.
  2. Select “Schaff Trend Cycle” from the list of available indicators.
  3. Click the “OK” button to apply the indicator to your chart.

The indicator is now ready to use.

Schaff Trend Cycle in MetaTrader
Schaff Trend Cycle in MetaTrader

How to use the Schaff Trend Cycle indicator?

STC is a fairly simple indicator because it doesn’t have many uses, and keep in mind that although originally it is designed for forex trading, it can be effectively applied to all types of assets and in all time frames.

If the indicator crosses the 25 lines, the trend is assumed to take a positive turn (according to the indicator).  This is the case when traders want to open a buy position, but only when the confirmation is received.

Buying with Schaff Trend Cycle
Buying with Schaff Trend Cycle

What is confirmation?

A candle moving in the same direction as the current can be seen as confirmation. Measured values ​​from other indicators that match the STC can also be regarded as confirmation. The same rules apply to bearish trends. When the indicator drops below 75, traders consider opening a short position.

Selling with Schaff Trend Cycle
Selling with Schaff Trend Cycle

A straight line in the Schaff Trend Cycle can indicate ranging market conditions and the easing of a market trend.

Straight line in Schaff Trend Cycle
Straight line in Schaff Trend Cycle

Schaff Trend Cycle trading strategy

The Schaff Trend Cycle (STC) indicator is an oscillator that provides buy and sell signals for trading and identifies market trends. Buy and sell points are typically set at 25 levels upward (buy) and 75 levels downward (sell).

The simplest and most obvious way to use this indicator in trading is to sell when the line drops below level 75 and to buy when it rises above level 25. To filter out some more bad signals, Doug Schaff (the author of Schaff Trend Cycle) offers the following method: for a buy signal, the bar following the trigger bar should close above the high of the trigger bar; for a sell signal, the bar following the trigger bar should close below the low of the trigger bar. Trigger bar is the bar formed at the same time as the Schaff Trend Cycle rose above 25 or declined below 75.

The following is a straightforward forex trading system based on oversold and overbought areas in the Schaff Trend Cycle:

Schaff Trend Cycle buy strategy

  • You can buy an asset if the indicator line moves below the 25 line and then rises above it.
  • You can wait for a bullish candle to form as a confirmation to buy.
  • Stop-loss can be placed around the recent swing low position.
  • Take-profit can be at least 1:2 for a favourable risk to reward ratio
Schaff Trend Cycle buy trading signal
Schaff Trend Cycle buy trading signal

Schaff Trend Cycle sell strategy

  • You can sell an asset if the indicator line moves above the 75 line and then falls below it.
  • You can wait for a bearish candle to form as a confirmation to buy.
  • Stop-loss can be placed around the recent swing high position.
  • Take-profit can be twice the size of your stop-loss for a favourable risk to reward ratio.
Schaff Trend Cycle sell trading signal
Schaff Trend Cycle sell trading signal

Schaff Trend Cycle conclusion

The Schaff Trend Cycle is a method, developed by Doug Schaff in the 1990s and based on the concept that trends also have repeating high and low patterns, or cycles. This is a modified MACD line, run through a modified stochastic algorithm and smoothed with Wilders smoothing in order to estimate the final Schaff Trend Cycle (STC) indicator. Its purpose is to identify the direction, in which a trend cycle is moving and possible peaks and bottoms within this cycle.

Schaff Trend Cycle is a charting indicator used to help spot buy and sell points in the forex market. Compared to the popular MACD indicator, STC will react faster to changing market conditions. A drawback to STC is that it can stay in overbought or oversold territory for long stretches of time.

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