What is the Schaff Trend Cycle?

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  • 17 Oct 2023
What is the Schaff Trend Cycle?

Key Highlights

  • The Schaff trend cycle is a technical analysis indicator that is used to identify upcoming trends and generate trading opportunities.
  • This indicator helps users identify trends in a simple and better way compared to other MA indicators.
  • There are advantages and disadvantages to the STC indicator. According to your trading style, you can invest or not in the following indicator.

The Schaff Trend Cycle (STC) is a momentum indicator developed in the 1990s by Doug Schaff to identify market trends and potential reversals in the share market. The STC oscillator fluctuates between 0 and 100, with readings above 50 indicating an uptrend, while readings below 50 signal a downtrend.

The STC combines several factors to generate its oscillator: a short-term cycle, a longer cycle, and a MACD histogram. The short cycle helps identify short-term swings, the longer cycle captures broader trends, and the MACD adds momentum. The STC aims to identify trend exhaustion points and potential trend reversals earlier than other indicators. Crossovers of the STC line can generate trading signals; when the STC crosses above 50, it may signal an uptrend, while falling below 50 can indicate a downtrend. The STC aims to avoid whipsaws by smoothing out its lines.

To identify the Schaff trend, you need to follow the following steps:

Step 1: Calculate the STC oscillator

This calculation fluctuates between 0 and 100. The typical STC settings are 23–50–100 for the short, medium, and long cycles.

Step 2: Identify the current trend in stock market

Trend direction can be identified by readings above 50, which indicate an upward trend, while readings below 50 signal a downward trend.

Step 3: Look for crossovers of the 50-level

When the STC crosses up through 50, this may signal the start of an uptrend. When it crosses down through 50, this can signal the start of a downtrend.

Step 4:

Identify and watch for STC peaks and troughs. Peaks above 70 suggest a strong uptrend, while troughs below 30 indicate a strong downtrend.

Step 5: Look for trend reversals

An STC peak is followed by a downward crossover of 50 signals, trend exhaustion, and a potential reversal to the downside. An STC trough and upward crossover can signal a trend reversal.

Note that a crossover, along with MACD histogram bars changing direction, can reinforce the STC signal. Consider 50–61 as a neutral zone. Trend reversals are less reliable if the STC remains between 50 and 61 rather than crossing decisively above or below 50. The STC can filter out minor fluctuations. Use other analyses with the STC for confirmation. Combine with price action analysis, support/resistance, or other indicators.

The Schaff Trend Cycle is a versatile indicator that can identify new trends, signal potential exhaustion points, and warn of trend reversals earlier than some other indicators. The STC oscillator fluctuates between 0 and 100. In general, readings above 50 indicate an uptrend, while readings below 50 signal a downtrend.

When using the STC, start by identifying the overall trend direction. Then look for overbought or oversold readings and crossovers of the 50 level for signs of trend reversals. An STC peak above 70 followed by a drop below 50 warns of a potential trend reversal to the downside. The opposite pattern, a trough below 30 and then a crossover above 50, may signal an uptrend developing. Look for confirmation from price action and other indicators. The STC can generate earlier reversal signals but smooth out whipsaws using a moving average of the oscillator. Adjust input settings as needed for the market to be analysed. Combine the STC with other analysis techniques for robust signalling of trend exhaustion and reversals.

The Schaff Trend Cycle (STC) indicator and the Moving Average Convergence Divergence (MACD) indicator are both technical analysis tools used to measure the strength and direction of trends in the share market.

Similarities between them can be explained in the following way:

Both are considered to be momentum indicators. They are designed to identify the strength & momentum of securities in the market. Both indicators typically include signal lines that are used to generate trading signals. And in the MACD, the signal line is derived from the MACD line itself, while in STC, it uses a signal line based on the STC values. Crossover between the indicator line and the signal line is quite important. STC & MACD indicators are used to highlight overbought and oversold conditions in the stock market. Atlast indicators often use the moving averages to calculate their signal line.

As we cover the similarities between the STC and the MACD, now cover the differences between the STC indicator and the MACD indicator in the below table:

Factors Schaff Trend Cycle Moving Average Convergence Divergence
Trend Duration
STC is smoother oscillator for long-term trends.
MACD is more responsive for short-term momentum changes
Calculation Method
STC combines the stochastic oscillator and the RSI with moving averages to calculate the STC values.
MACD is calculated based on the difference between two moving averages and involves subtracting the longer-term moving average from the shorter-term moving average.
Components with an indicator
STC incorporates a MACD histogram into its calculation
The MACD histogram provides additional information for the MACD indicator.
Interpretation
STC oscillates between 0 and 100, with readings above 50 indicating an uptrend
In the case of MACD, it oscillates above and below zero, with positive values signalling an uptrend.
Inputs
The STC requires more parameter inputs and optimisation
Compare to STC, MACD calculator is simple & straightforward.

Conclusion

Therefore, the STC is a smoother oscillator tailored to the trader's needs, while the MACD reacts faster to changing trends and momentum. The STC aims for early reversal detection, while the MACD excels at trend confirmation. You can decide which indicator works for you. You can also download the Kotak Securities app for more details on stock trading. Just track & manage your financial portfolio with ease from the Kotak Securities trading platform.

FAQs on Schaff Trend Cycle

The STC calculator is done with the incorporation of MACD histogram . The specific STC calculation uses these components to generate smoothed oscillator readings.

The common adjustable inputs are the periods for the three cycles (e.g. 23, 50, 100) and the MACD settings used. These affect the sensitivity and smoothing of the oscillator.

The default settings are often a short cycle of 23, medium cycle of 50, and a long cycle of 100. A 10-period MACD is also commonly used. But these can be optimised for specific assets or timeframes.

To trade with STC indicators, you need to look for STC crossovers, overbought or oversold readings, and divergences. For example, STC crossovers above 50 may signal uptrends, while crossovers below 50 can signal downtrends.

Like other indicators, the STC can generate false signals. It should be combined with other analysis like price action, trends, and patterns rather than used on its own.

It's best to confirm STC signals using other indicators (e.g. RSI, MACD), you can also use chart patterns, and an overall technical analysis of the trend and momentum. Divergences can also act as confirmation of this indicator.

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