What is the Schaff Trend Cycle?

Technical analysis is a broad concept. The concept includes a wide range of indicators, patterns and charts that traders can benefit from. The Schaff Trend Cycle (STC), is the most popular of all the technical indicators. Although the Schaff indicator is similar to the Moving Average Convergence Divergence indicator (MACD), it has a higher level of accuracy. Let's dive deeper into the Schaff Trend Cycle indicator to learn more about its operation.

What is the Schaff Trend Cycle and how does it work?

The Schaff Trend Cycle was developed by Doug Schaff in the 1990s. It is an oscillating indicator. The STC indicator can be used to identify trends as well as their direction. It can also be used by traders to predict trends reversals. Traders can then use the buy and sell signals generated by the Schaff Trend Cycle to determine whether they want to open long or short positions.

The Schaff indicator is based on the idea that bullish and bearish trends are cyclical with repeated highs and lowers. This basically means that the market's movement reverses at the end every trend and creates a new trend. If the market is trending upwards, then at the end the downward trend would be reversed and the market will adopt a new trend. The market would then reverse its downward trend and adopt an uptrend. This kind of cyclical movement continues.

How does the Schaff indicator appear?

The white Schaff indicator line, also known as the signalline, is a line that tracks the movement of the asset's price. You can also see it making repeated highs or lows, which confirms that trends occur in a cyclical fashion.

Two other horizontal lines are also included in the indicator, labeled "25" and "75". These lines mark the indicator's lower and higher limits. The white area is the percentage of time spent above and below the lower limits.

How to use Schaff Trend cycle indicator ?

It is easy to understand and use the Schaff Trend Cycle indicator. The signal line that rises above the Schaff indicator's upper limit of 75 indicates the asset's entry into the 'overbought" territory. This is a sell signal because the market is susceptible to corrections and the trend could reverse at any time. When traders see the signal line cross the '75' mark they have two options: either they can sell the asset to exit the market or they can take a short position in order to profit from the trend reversal.

The signal line below the Schaff indicator's lower limit of 25 signifies that the asset has entered the 'oversold territory. This signals a "buy" signal, since the market is susceptible to rebound and the trend can reverse at any time. When traders see the signal line cross the '25' mark they have two options: either to take a long position and profit from the price rise, or exit the market covering their short positions.

A trend is formed when the signal line lies between these extremes. The trend may be bullish or bearish depending on the circumstances. This information can be used by traders to identify potential favorable trends and initiate trades.

Conclusion

Traders in the forex market use the Schaff Trend Cycle indicator most often. It is only able to work on liquid and high volume markets. The indicator can however be used on high-liquid equity counters. The Schaff Trend Cycle is able to indicate overbought or oversold levels but it cannot predict how long an asset will remain in these levels. It is important to be cautious when trading on the basis of this indicator.