What is the Schaff Trend Cycle?
When winter ends, the summer begins, and when summer ends, the monsoon starts. The same pattern is followed in the stock market. The price of stocks will increase after a particular decline stage and vice versa. The weather department forecasts the upcoming season, temperature and its expected intensity, etc. Likewise, there exist certain technical indicators that indicate the trends in the stock market. One such trend indicator is the Schaff Trend Cycle.
Schaff Trend Cycle
The Schaff Trend Cycle is one of those technical indicators which helps in predicting and recognising price trends and directions. This indicator was named after the man who introduced this concept, Doug Schaff. The Schaff Trend Cycle indicator is more often used in the Forex market which indicates the potential trend reversal. Traders can decide on entry or exit by observing this Schaff Trend Cycle indicator.
The Schaff Trend Cycle is one of those technical indicators which helps in predicting and recognising price trends and directions. This indicator was named after the man who introduced this concept, Doug Schaff. The Schaff Trend Cycle indicator is more often used in the Forex market which indicates the potential trend reversal. Traders can decide on entry or exit by observing this Schaff Trend Cycle indicator.
Schaff Trend Cycle is an important indicator to predict market trends. This indicator functions similarly to the Moving Average Convergence Divergence. The reason behind the efficiency of the Schaff Trend Cycle indicator is that it removes the barrier faced by MACD. This barrier is the slower responsiveness of the MACD indicator. This indicator responds comparatively much quicker.
How does the Schaff Trend Cycle indicator work?
This indicator resembles Moving Average Convergence Divergence. It is a combination of MACD and Stochastic Oscillators. MACD Oscillators can be used to indicate the potential change in trend direction which aids the traders to take entry and exit positions. Stochastic oscillators are used to signal an overbought and oversold territory. This combination of MACD and Stochastic oscillators brings more accuracy as compared to independent indicators.
It uses Exponential Moving Averages (EMA) to recognise the trends. EMA is used for analysis as it gives more importance to recent data. If the slope in EMA charts goes upward, it indicates an uptrend and vice versa.
It uses Exponential Moving Averages (EMA) to recognise the trends. EMA is used for analysis as it gives more importance to recent data. If the slope in EMA charts goes upward, it indicates an uptrend and vice versa.
It uses Exponential Moving Averages (EMA) to recognise the trends. EMA is used for analysis as it gives more importance to recent data. If the slope in EMA charts goes upward, it indicates an uptrend and vice versa.
Inverse to this, if the Schaff indicator goes below the lower limit of ’25’, this is the indication of stock in ‘oversold’ territory. This shows a buy signal to the trader. If the indicator is between 25 and 75, this means the trend is developing on one side.
What is the Formula of the Schaff Trend Cycle indicator?
To calculate Schaff Trend Cycle uses these three inputs:
- Short-term exponential moving average with a default time of 23 days
- Long-term exponential moving average with a default time of 50 days
- Cycle adjusted at half of cycle length with 10 points default value.
Firstly calculate 23-days EMA, and 50-days EMA as well as MACD.
EMA 1 = EMA (Close, Short Length)
EMA 2 = EMA (Close, Long Length)
MACD = (EMA 1 – EMA 2)
Then calculate, 10-day stochastic as following:
%K (MACD) = %KV (MACD, 10) %D (MACD) = %DV (MACD,10)
The next step is to put the values in the formula. The formula used to calculate the Schaff Trend Cycle is as below:
Schaff Trend Cycle = 100 x {MACD - %K (MACD)} / {%D (MACD) - %K (MACD}).
Final Words
The Schaff Trend Cycle is a reliable technical indicator to predict and identify the trend in the market. Not just for the currency market, it is used for securities as well. Similar to other technical indicators, this indicator has some limitations, too. The exact time between the changes of trend can not be determined.
Similar to other technical indicators, this does not provide 100% accurate results. Rather than using it independently, you can use this indicator along with others to have the best investment strategy.
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Frequently Asked Questions
The Schaff indicator line looks like a cyclical pattern. The reason is the repeated highs and lows as well as the price movements from uptrend to downtrend and vice versa.
The Schaff Trend Cycle includes two lines, one representing the lower limit and another representing the upper limits of the indicator. These lines are labelled ‘25’ and ‘75’ respectively.
Schaff Trend Cycle indicator tells the traders when to enter or exit the position. If the Schaff indicator goes above the upper limit of ‘75’, it indicates that the stock has reached overbought territory. This shows a sell signal to the trader.
Inverse to this, if the Schaff indicator goes below the lower limit of’25’, this is the indication of stock in ‘oversold’ territory. This shows a buy signal to the trader.