The Schaff Trend and What Traders Should Know About the Indicator
In any trend-following strategy, there are two outcomes any trader wishes for. These are to enter a trade on time and exit it on time. All traders aim to detect trend changes early enough and exit the transaction on time after exploiting it to the fullest. This is easy in theory and more difficult in practice, with most indicators lagging and not as reliable as they should be.
There are numerous indicators traders can use in analyzing market trends. Some are technical and others economic indicators. The economic indicators assess both financial and industrial situations and provide useful data about the future profitability of public companies. Technical indicators are used for predicting possible price patterns and stock trend changes.
There is no single indicator that can guarantee a trader’s success. However, come indicators are worth your time and are popularly used by traders, such as the Schaff Trend Cycle.
What is the Schaff Trend Indicator?
The Schaff Trend Cycle or STC identifies market trends. It gives traders the signal to either buy or sell. STC is named after its inventor Doug Schaff, who invented the indicator in 1999. The STC is premised on the assumption that all currency trends shift in cycles.
The STC is an oscillator that operates between either of two extremes-oversold and overbought. When the indicator moves into the upper extreme, the oscillator falls into the overbought zone. Conversely, when the oscillator falls into the lower extreme, the asset is oversold.
How the STC Works
Most traders use the MACD (moving average convergence/divergence) charting tool. The MACD is an indicator that forecasts price action and is renowned for lagging because it has a slow responsive signal line. In contrast, the STC has a responsive signal line that detects up and downtrends faster, way ahead of the MACD indicator.
STC and MACD are computed using similar exponential moving averages, but STC injects a new cycle component that improves reliability and accuracy. MACD is calculated via a series of MAs (moving averages), but STC’s cycle aspect is time-based.
Traders should note that STC’s development was primarily for the faster currency markets. Still, it can be used in all markets regardless, just like MACD’s development was primarily for the more rapid currency markets, but it can be used in all markets regardless, just like MACD. You can apply it to intraday charts for five or sixty-minute charts or daily, weekly, or monthly time charts.
The STC may seem to have better reliability compared to MACD, but it has some flaws. STC tends to linger in the overbought and oversold zones for long periods. This lingering means the indicator is primarily used for the intended purpose. It follows the signal up or down and profits as soon as the signal line hits bottom or top.
How to Apply the STC
STC is a simple indicator as it does not have too many uses. Although its original design was for the Forex market, you can use it across all time frames and types of assets. For traders, when the indicator is above the 25 line, the trend seems to be taking a favorable turn. This is the point where traders can open a buy position, but with confirmation. Confirmation is when a candle after the current candle moves towards a similar direction.
Other indicator readings that align with STC are considered as confirmation. The same rules go for negative trends. When the indicator drops below 75, some traders open a sell position. You must double-check the indicator readings, and this includes the STC.
The best time to close a deal is when the trend runs out of power, and the indicator turns to a straight line. A new trend is then needed to open a new contract.
How to Set UP the STC
If you are working with IQ, setting up the STC is easy:
- Click on the “Indicators” tab on the bottom left corner of your screen and navigate to the “Momentum: button.
- Select “Schaff Trend Cycle” from the list of indicators
- Don’t change the default setting and click on the “Apply” tab. A veteran trader can adjust the settings if they so wish, but this is not the best move for a novice.
- Your indicator is ready
The STC is an excellent oscillator for all traders. However, it pays to remember that the STC cannot provide you with accurate signals every time, like other technical analysis indicators. From time to time, the tool may return false signals. Being a leading indicator, the STC sends signals way before the price move has been affected. Due to its lack of accuracy, like some lagging indicators, traders should use it with other tools for better accuracy.