Schaff Trend Cycle Indicator – How Traders Use This Versatile Oscillator

The Schaff Trend Cycle (STC) indicator was developed in the 1990s by noted technical analyst Doug Schaff. This unique oscillator aims to identify potential tops and bottoms in the market earlier than other indicators.

The STC has since become a popular indicator for Metatrader 4 and TradingView among forex, stock and crypto traders. In this post, we’ll break down what the Schaff Trend Cycle is, how traders use it to generate trading signals, optimal settings, and strategies to use with this versatile oscillator.

What is the Schaff Trend Cycle Indicator?

The Schaff Trend Cycle is a momentum oscillator that fluctuates between 0 and 100. The STC consists of two components:

• Cycle – Identifies potential oversold/overbought turning points in the market.
• Trend – Calculates short to medium-term trend direction using MACD.

The cycle portion looks ahead to potential reversals while the trend portion defines the current momentum bias. Used together, the STC aims to spot trend changes earlier than other oscillators.

How Traders Use the Schaff Trend Cycle Indicator

The most common way traders utilize the STC is looking for oversold/overbought reversals:

• Oversold – STC dropping below 30 signals potential bottoming and bounce ahead. Look to buy.
• Overbought – STC rising above 70 hints at market topping out. Look to take profits or short.

As with RSI or Stochastics, levels above 70 or below 30 on the STC suggest potential exhaustion ahead. Traders prepare for trend changes.

Schaff Trend Cycle vs. RSI and Stochastic

Compared to other oscillators:

• STC aims to identify reversals 1-3 bars earlier than RSI or Stochastic.
• Smoother than choppy, spiky Stochastic oscillator with less false signals.
• More responsive to swings than lagging, slow RSI.

The STC’s blend of smoothness, responsiveness and predictive focus makes it a popular alternative to RSI and Stochastic.

Schaff Trend Cycle Strategies and Signals

Some trading strategies using the STC include:

Overbought/Oversold Reversals

• Buy when STC drops below 30 signaling oversold bounce ahead.
• Sell when STC rises above 70 anticipating market topping out.

Trend Trading

• Go long when STC sustains above 50 showing bullish momentum accelerating.
• Exit longs when STC drops decisively below 50 indicating downward momentum.

Divergence

• If price hits higher high but STC fails to exceed previous peak, trend reversal likely ahead.

The STC provides relatively early and smooth signals for momentum traders across forex, crypto and equities.

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Optimal Settings for the Schaff Trend Cycle

The standard STC setting is 23 using 23-period EMAs to calculate the trend bias. But the indicator can be customized:

• Timeframe – STC can be used on charts from 1 minute up to monthly. Lower timeframes will be more volatile.
• Length – Shorter cycles like 10 will react faster to swings but with more whipsaws. Length of 30 smoothes oscillation.
• Levels – 30 and 70 work well for oversold and overbought zones. Widen or tighten based on instrument volatility.

Adjust STC settings to suit the market traded and your style – from short-term scalping up to position trading timeframe approaches.

Using STC with Other Indicators

The Schaff Trend Cycle works well confirming signals when combined with:

• Moving Averages – STC staying above 50 and price above EMAs signals strong uptrend.
• RSI – Adding RSI visualizes momentum extremes. RSI above 70 aligns with STC peak.
• MACD – Crossover of MACD lines confirms new STC signal.
• Stochastics – Peaks or valleys in Stochastics corroborate STC overbought/oversold signals.

No single indicator works perfectly alone. Combining STC with other technicals provides high probability trade setups.

Conclusion

The Schaff Trend Cycle aims to identify trend changes earlier through its blend of smooth momentum tracking and predictive cycle analysis.

Key points:

• Oscillates between 0 and 100 with overbought/oversold thresholds at 70 and 30.
• Aims to generate earlier reversal signals than lagging RSI or choppy Stochastic.
• Works well on all timeframes and markets – forex, stocks, crypto, commodities.
• Combines well with moving averages, RSI, MACD and other oscillators.

If you find standard oscillators like RSI too sluggish in reacting to reversals, give the Schaff Trend Cycle a try. Smoother and more responsive, the STC can provide an edge for momentum traders across markets and timeframes.