Schaff Trend: A Faster And More Accurate Indicator

The Schaff Trend Cycle (STC) indicator is an oscillator commonly used to identify market trends and provide buy and sell signals to traders. Developed in 1999 by noted Forex trader Doug Schaff, the STC indicator is based on the assumption that currency trends accelerate and decelerate in cyclical patterns that may reflect the dominant price cycle of any currency, during any time frame.

The STC detects up and down trends long before the moving average convergence/divergence (MACD), an indicator notorious for lagging, due to its slow responsive signal line. Contrarily, the STC’s improved signal line enables it to detect currency trends sooner. While the STC uses the same exponential moving averages as the MACD, it adds a novel cycle component, to improve accuracy and reliability.

It should be noted that although the STC was developed primarily for fast currency markets, it may be effectively employed across all markets. (To learn more, see "Stochastics: An Accurate Buy and Sell Indicator.")

While the STC indicator boasts higher reliability, it has inherent flaws. Namely, it has the ability to linger in overbought and oversold markets, for extended periods of time. For this reason, this indicator should be solely used for its intended purpose of following the signal line up and down, and taking profits when the signal line hits the top or bottom.

Consider the following hourly chart of the GBP/JPY, the granddaddy of currency pairs. While the MACD generates its signal when the MACD line crosses with the signal line, the STC indicator generates its buy signal when the signal line turns up from 25 (to indicate a long sale), or turns down from 75 (to indicate a short sale).

Figure 1

Source: Standard Pro Charts

The chart clearly shows that the STC generated vastly more signals then the MACD, consequently serving as a superior early trend change warning (on the far left, indicated by the long red candle).

A sell signal was generated at 142.50, and stopped at 139.50 – a 300 pip move. While the MACD lines hovered around 140, the STC line generated a buy signal at roughly 140.00, and stopped at 142.45 – a 245 pip move. The next sell signal was generated at approximately 144.00, and lasted until 141.50 – a 250 pip move. The chief takeaway: all of these moves occurred ahead of the buy and sell signals generated by the MACD.

Notice how many times the STC line resulted in a straight line, signaling an overbought or oversold market. It’s a veritable certainty that oversold markets will eventually become overbought markets, and vice versa, especially when it comes to the currency cycle aspects of this indicator. 

The STC indicator is a forward-looking, leading indicator, that generates faster, more accurate signals than earlier indicators, such as the MACD. For additional reading, check out "MACD Histogram Helps Determine Trend Changes" and "Spotting Trend Reversals With MACD."