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.
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:
- Download the indicator and go to the MQL folder of your trading terminal. Then choose the “indicators” folder and place the indicator there.
- Select “Schaff Trend Cycle” from the list of available indicators.
- Click the “OK” button to apply the indicator to your chart.
The indicator is now ready to use.
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.
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.
A straight line in the Schaff Trend Cycle can indicate ranging market conditions and the easing of a market trend.
Schaff Trend Cycle trading strategy
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 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 conclusion
I would prefer to use the majority of technical indicators such as the Schaff Trend Cycle indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
The Schaff Trend Cycle indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Schaff Trend Cycle indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Schaff Trend Cycle indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.