Schaff Trend Cycle: A Powerful Momentum Indicator for Identifying Trends

By:  Ivan Cavric 

Schaff Trend Cycle is a momentum indicator that is designed to identify trends in the market. It was developed by Doug Schaff and is based on the principle of combining two popular indicators - the Moving Average Convergence Divergence (MACD) and the stochastic oscillator.

The Schaff Trend Cycle indicator is calculated using the following steps:

  1. Calculate the MACD by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.
  2. Calculate the signal line by taking a 9-period EMA of the MACD.
  3. Calculate the slow stochastic oscillator using the high, low, and closing prices over a specified period.
  4. Calculate the Schaff Trend Cycle by applying a 10-period EMA to the slow stochastic oscillator.

The resulting indicator is a smoothed version of the slow stochastic oscillator that combines the power of the MACD and stochastic oscillator to identify trends in the market.

One of the main advantages of the Schaff Trend Cycle indicator is its ability to identify overbought and oversold conditions in the market. When the indicator moves above 80, it may suggest that the instrument is overbought and due for a pullback, while a move below 20 may suggest that the instrument is oversold and due for a bounce.

Traders can use the Schaff Trend Cycle indicator in a variety of ways. One common approach is to look for potential trading opportunities when the indicator crosses above or below the 50 level. When the indicator is above 50, it may suggest that the instrument is in an uptrend, while a move below 50 may suggest that the instrument is in a downtrend.

Traders can also use the Schaff Trend Cycle indicator in conjunction with other technical indicators and trading strategies. For example, some traders may use the indicator to confirm signals from other momentum indicators, such as the Relative Strength Index (RSI) or Moving Average Envelope.

The Schaff Trend Cycle indicator is a powerful momentum indicator that can be used to identify trends in the market. It combines the MACD and stochastic oscillator to provide a smoothed version of the slow stochastic oscillator, making it particularly useful in identifying overbought and oversold conditions and potential trading opportunities. As with any technical indicator, it's important to remember that the Schaff Trend Cycle should be used in conjunction with your own analysis and trading strategy.

Location: Welland, ON, Canada

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