Schaff Trend Cycle Indicator: How it Compares to the MACD (2024)

What Is Schaff Trend Cycle Indicator?

The Schaff Trend Cycle (STC) is a technical analysis indicator used in trading and investing to identify trends and generate trading signals. It was developed by Doug Schaff to improve upon trading moving averages by incorporating cycle analysis.

The STC is designed to identify trends and trend reversals by measuring the strength of the trend and the speed of price changes. The STC is an oscillator, which means that it measures the velocity of price movements.

One version of the STC calculation is the subtraction of the 23-period exponential moving average (EMA) from a 50-period EMA. The resulting value is then smoothed using a 10-period moving average (MA). The STC oscillates between 0 and 100, with values above 50 indicating a bullish trend and values below 50 indicating a bearish trend.

What is the Moving Average Convergence Divergence (MACD) Indicator?

The Moving Average Convergence Divergence (MACD) indicator is a popular technical analysis indicator used in trading and investing to identify potential trend reversals, generate buy or sell signals, and measure the strength of a trend. It was developed by Gerald Appel and is widely used by traders and investors across various financial markets.

The MACD is calculated by subtracting the 26-period EMA from the 12-period EMA. The result of that calculation is the MACD line. A 9-period EMA of the MACD line is called the signal line, which is then plotted on top of the MACD line. This functions as a trigger for buy or sell signals.

Similarities and Differences Between the STC and the MACD

The STC indicator and the MACD are similar in their construction and application. The two (2) technical analysis indicators also have notable differences.

Similarities Between the STC and the MACD

Here are the key similarities between the STC and the MACD:

• Calculation Method: Both the STC and the MACD use MAs in their calculation. The MACD calculates the difference between two (2) EMAs, while the STC can incorporate EMAs as part of its calculation.
• Trend Identification: Both indicators are primarily used to identify trends in the price of a security or asset. They aim to capture the momentum and direction of price movement.
• Oscillating Indicator: Both indicators generate values that oscillate above and below a centerline. The MACD has a centerline at zero, while the STC oscillates between 0 and 100.
• Signal Line: The STC and the MACD have a signal line that helps generate trading signals. The MACD indicator uses a 9-period EMA as the signal line, while the STC often incorporates a 9-period EMA or similar MA as the signal line.
• Crossover Signals: Both indicators utilize crossovers between the indicator line and the signal line to generate buy and sell signals. A bullish crossover occurs when the indicator line crosses above the signal line, while a bearish crossover happens when the indicator line crosses below the signal line.
• Overbought and Oversold Conditions: The STC and the MACD provide insights into potential overbought and oversold conditions. With the MACD, extreme values above zero suggest overbought conditions, while extreme values below zero indicate oversold conditions. In the STC indicator, values above 75 are considered overbought, and values below 25 are considered oversold.

Differences Between the STC and the MACD

Here are the key differences between the STC and the MACD:

• Calculation Method: The MACD calculates the difference between two (2) EMAs to derive its values, while the STC combines EMAs with cycle analysis to generate its values. The specific formulas and periods used in the calculations differ between the two.
• Signal Line Calculation: The MACD indicator uses a separate 9-period EMA as its signal line, which is plotted alongside the MACD line. In contrast, the STC indicator may use a 9-period EMA or a similar MA as its signal line, but it is not always a required component.
• Overbought and Oversold Levels: The overbought and oversold levels for the MACD indicator are typically defined by extreme values above or below zero. On the other hand, the STC indicator defines overbought conditions as values above 75 and oversold conditions as values below 25 on its 0 to 100 scale.
• Focus on Trend Cycles: The STC indicator places a greater emphasis on identifying and tracking trend cycles, incorporating cycle analysis in its calculation. It aims to provide a smoother representation of price trends by filtering out noise and focusing on significant trend changes. The MACD indicator, while it can provide insights into trends, is more broadly used to assess momentum and generate signals based on the crossing of its components.
• Interpretation and Application: While both indicators are used for trend identification and generating signals, they may be favored by different traders or applied in different market conditions. The STC indicator is particularly known for its suitability in trending markets, while the MACD indicator is popular for its versatility in different market conditions and its ability to identify divergences.

Various Uses of STC

Firstly, set the parameters. The STC has three (3) parameters: the fast period and the slow period. The fast period determines how quickly the indicator reacts to price changes, while the slow period smooths out the signal. The default values for the fast and slow periods tend to be 23 and 50, respectively. The third parameter is the smoothing parameter, which is usually set at 10.

One use of the STC is to identify trends. This is done by looking for sustained periods when the indicator is above or below the zero line. A rising STC line indicates a bullish trend, while a falling STC line indicates a bearish trend.

Another use of the STC is to identify overbought and oversold conditions. This is done by observing periods when the indicator is above or below the 25 and 75 levels. An STC line that is above the 75 level indicates an overbought condition, while an STC line that is below the 25 level indicates an oversold condition.

Also, the STC can be used to generate buy and sell signals by looking for crossovers of the STC line with the zero line. A buy signal is generated when the STC line crosses above the zero line, while a sell signal is generated when the STC line crosses below the zero line.

It is important to note that the STC indicator is not perfect, and it can sometimes generate false signals. Another important note is that the indicator should be used in conjunction with other technical analysis indicators and fundamental analysis to confirm any signals that it generates.

Various Uses of MACD

Firstly, set the parameters. The MACD has three (3) parameters: the fast period, the slow period, and the signal period. The fast period determines how quickly the indicator reacts to price changes, while the slow period smooths out the signal. The signal period determines how many periods the MACD line is lagged behind the signal line. The default values for the fast, slow, and signal periods are 12,26, and 9 respectively.

One use of the MACD can be used to identify trends by looking for sustained periods when the MACD is above or below the signal line. A rising MACD line indicates a bullish trend, while a falling MACD line indicates a bearish trend.

Also, the MACD can be used to identify overbought and oversold conditions by observing periods when the MACD line is above or below the zero line. A MACD line that is above the zero line indicates an overbought conditions, while a MACD line that is below the zero line indicates an oversold condition.

Another use of the MACD is to generate buy and sell signals by looking for crossovers of the MACD line with the signal line. A buy signal is generated when the MACD line crosses above the signal line. Conversely, a sell signal is generated when the MACD line crosses below the signal line.

The STC and MACD in Use

As mentioned earlier, there are various ways of using both the STC and MACD. In this case, the STC will be utilized through observing the overbought and oversold levels. As it pertains to the MACD, the changes in the respective histogram will be observed.

As it pertains to the STC, the fast period and slow period were the 23 and 50 parameters respectively. The smoothing parameter was set at 10. The MACD in this illustration is the default 12, 26, 9 setting. These settings were charted on the USD/JPY forex cross on a 15-minute chart.

On this chart, the arrows show the signals generated by the STC indicator while the "X" show the signals derived by the MACD. The blue colored symbols indicate to go long USD/JPY while the red colored symbols indicate to go short USD/JPY.

Over the observation period, the MACD generated twice as many signals as the STC. During this period, the first signal from the STC was a sell signal at 139.714. Then, USD/JPY declined, with a low of 138.755. The STC generated a buy signal at 138.942. This trade would have generated a profit of 77.2 pips or 0.55%.

Another STC trade signal occurred on Thursday 8th June at 1:45 pm. The level at which this signal generated was 138.942. The forex cross USD/JPY then rallied, with a high of 139.726. The STC had a sell signal at 139.575 a couple hours after the high. This trade would have generated a profit of 63.3 pips or 0.46%.

The above is only an illustration and not a recommendation to choose the STC over the MACD or vice versa. The choice between the STC and MACD are heavily dependent on the timeframes being traded as well as the parameters of factors being input into the technical indicators.

In this instance, the use of the STC provided smoother, more profitable signals than the MACD.

The Bottom Line

The Schaff Trend Cycle (STC) indicator combines cycle analysis and moving averages to identify trends and potential reversals. It oscillates between 0 and 100, with values above 50 indicating a bullish trend and values below 50 indicating a bearish trend. The STC indicator, given the parameters used, can offer a smoother representation of price trends and customizable parameters to adapt to different market conditions.

In comparison, the Moving Average Convergence Divergence (MACD) indicator calculates the difference between two moving averages and generates signals through crossovers. It helps identify trend direction, momentum, and overbought/oversold conditions. The MACD is widely used and
provides familiar signals through its crossovers, making it versatile across various markets and timeframes.

Both indicators serve the purpose of identifying trends and potential reversals, but they differ in their calculation methods and characteristics. The STC indicator focuses on cycles and provides a smoother representation of trends, while the MACD emphasizes moving average differences
and generates crossover signals. Traders can choose the indicator that aligns with their preferences and trading style.