Schaff Trend Cycle indicator. The mix of Stochastic and MACD to determine overbought and oversold levels
The Schaff Trend Cycle trading indicator is an oscillator designed to find market overbought or oversold levels, which reads and processes data from another popular algorithm - MACD. Doug Schaff, the author of this tool, wrote in his articles that he tried to create a cross between the MACD and the stochastic oscillator, since the signals of the former are significantly lagging behind the real break in the trend, and the latter reacts too sharply to price fluctuations.
Despite the fact that the Schaff Trend Cycle indicator uses the values of two classical algorithms in its calculations, its signals allow you to look at the market from a different angle.
The author implemented his idea of a combination of two standard indicators in the following way - Schaff began to calculate Stochastic values not by the closing prices of candles, but by the MACD values. Thus, the values of this instrument are built by combining these standard indicators.
The Schaff Trend Cycle settings have the following parameters:
MAShort - the number of bars for calculating the fast moving average (it is included in the MACD);
MALong - the number of bars for calculating the slow moving average (another important MACD element);
Cycle - the period of the stochastic, which will be based on the MACD values, in other words, this is the cycle duration;
CountBars - the number of bars of the final marking that will be displayed on the screen.
Overbought or oversold of an asset is defined as Stochastic. For example, when the indicator line is above 80, we can say that the asset is overbought, but if the value of the oscillator is less than 20, then the market is oversold.
Accordingly, when the indicator line goes out of the extreme area (for example, breaks the 80 levels from top to bottom), one should look for an opportunity to conclude a deal. However, to keep the number of false signals to a minimum, it is reasonable to trade exclusively in the direction of the main trend, i.e., in a downtrend, overbought boundaries are of interest, and in a growing market, it is advisable to take into account only the oversold condition.
Practice shows that in this regard, the Schaff Trend Cycle indicator really benefits. The only problem that you will inevitably have to face is related to the optimization of its parameters for a specific asset or timeframe.
The Schaff Trend Cycle is a leading indicator, which means it sends out a signal before price moves in one direction or another. This also means that it has no accuracy as lagging indicators have and should be used in conjunction with other technical analysis tools. Overall, this is a great oscillator worth exploring and adding to your personal portfolio of useful indicators.
Tip: Can’t open the downloaded archive file (ZIP or RAR)?
Do you need help with installing this indicator into MT4 for Windows or Mac OS? Our guide HERE will help you.