What is Schaff Trend Cycle?

As a stock market investor, you can not hope to glide through the volatility and downtrends profitability without gaining financial knowledge. Multiple factors can affect the price of a particular stock. Some are internal such as the market trend, and some are external such as positive or negative business performance.

The only way to ensure fewer losses in your investments is by being well versed in evaluating the stocks before you take a position. As you may know, evaluating stocks is one of the most important aspects of stock trading, it is always a bad idea to leave it to luck or the current market trend. However, one thing is certain, professional investors who use technical analysis will always tell you to stay away from such stocks.

The process of technical analysis is always at the core of the stock evaluation process. If you enter too late, you lose potential profits; if you exit too late, you still lose. But, if you know how to do technical analysis and the included indicators such as Schaff and Trend Cycle, you can be sure of ideal entry and exit points.

What is Technical Analysis?

Technical analysis is the study of chart patterns, graphs, and diagrams on a screen. The idea is to understand price and volume trends and pick stocks accordingly. Technical analysis believes that fundamentals, news flows, or earnings surprises, are all in trice and volume. Technical analysis is based on the premise that historical price trends tend to repeat over time. In technical analysis, you sit with historical stock charts, look at price and volume data, and then plot various trends. Based on past wisdom, you find patterns to trade for the future.

What is the Schaff and Trend Cycle indicator?

The Schaff and Trend Cycle Indicator (STC) is a charting or technical indicator that allows investors to predict the market trend. Since it identifies the current and the possible future trends, investors can use the data provided by the Schaff and Trend Cycle indicator for ideal buy and sell signals.

The idea behind the Schaff and Trend Cycle indicator is the assumption that market trends increase or decrease in cyclical patterns, irrespective of the time frame. The Schaff and Trend Cycle indicator is a combination of the moving average convergence/divergence (MACD) and the Stochastic.

MACD is referred to as the king of technical indicators since it encompasses moving averages and oscillators. MACD identifies the overbought and oversold zones in the chart and recognizes the right entry and exit levels. The Stochastics give indications of when a stock is overbought and when it is oversold. The stochastic identifies the %K line and the %D line and uses crossover to identify greater conviction and precision oversold levels.

How does Schaff and Trend Cycle work?

The Schaff and Trend Cycle has been one of the most vital tools in the toolkit of investors to predict the market trend and find the best entry and exit points. Although the credit goes to the impeccable process used by the Schaff and Trend Cycle, the wide use of the indicator is also because of the flaws of the moving average convergence/divergence (MACD).

The MACD also does the same; identifies market trends. However, it lags immensely due to its signal line being responsive yet slow. On the other hand, the Schaff and Trend Cycle indicator’s signal line is far more responsive and quicker in identifying the uptrends and downtrends.

Similar to MACD, the Schaff and Trend Cycle is also calculated based on the exponential moving averages. Also known as exponentially weighted moving average, it places higher weightage on the most recent data points. EMAs are essentially used for analysis and as a trading indicator in the stock market. Slopes in the EMA charts signal the uptrend or downtrend of a stock. However, the Schaff and Trend Cycle is considered more accurate and reliable as it adds a novel cycle component that is based on the time frame (number of days).

How to calculate the Schaff and Trend Cycle

The formula of Schaff and Trend Cycle is:

Schaff and Trend Cycle = 100 x (MACD – %K (MACD)) / (%D (MACD) – %K (MACD) ).

The calculation is based on the following three inputs:

• The default period of the short-term exponential moving average is 23 days.
• The default period of the long-term exponential moving average is 50 days.

Firstly, you need to calculate all the 23-period, 50-period EMA along with the MACD values in the following way:

• EMA1 = EMA (Close, Short Length)
• EMA2 = EMA (Close, Long Length)
• MACD = (EMA1 – EMA2)

Secondly, you need to calculate the 10-period Stochastic from the above MACD values in the following way:

• %K (MACD) = %KV (MACD, 10)
• %D (MACD) = %DV (MACD, 10)

Once you have calculated the above values, you can put them in the Schaff and Trend Cycle formula mentioned above to get the results.

What does the Schaff Trend Cycle indicator tell traders?

The Schaff Trend Cycle indicator is one of the most effective ways to let investors know about the market trend, overbought and oversold conditions, buying and selling positions, and ideal entry and exit points. The Schaff and Trend Cycle indicator uses two thresholds of 25 and 75. If the Schaff and Trend Cycle indicator crosses the first threshold of 25, it generally indicates that the market is in an uptrend.

However, if the Schaff and Trend Cycle indicator has breached the 75 level line, it generally indicates the strengthening of the trend in either of the two directions (high or low). Furthermore, when the Schaff and Trend Cycle indicator’s straight line is above 75, it is a signal for an overbought condition. On the other hand, if the straight line is below 25, it signals oversold stocks.

Final Words

The Schaff and Trend Cycle indicator was first developed for predicting trends in the currency market. However, with its reliability and accuracy, the Schaff and Trend Cycle is widely used by investors and traders across tradable financial securities. Although it is one of the best and most reliable indicators, investors must use it with caution as it can get stuck between the overbought and oversold territory for a long time. If added with the data provided by other technical indicators, the Schaff and Trend Cycle can prove to be an effective contributing factor in making an ideal investing strategy.