There are different approaches to technical analysis for trading. Most of them include application of technical tools, such as lines and indicators. With a variety of instruments for analysis to choose from, some novice traders may feel overwhelmed. But there is no need to use all of them to enhance your trading skills and results.
You may try different tools to pick the most convenient and efficient ones. In this article, we will compare 2 popular instruments for technical analysis: Schaff Trend Cycle vs. MACD.
What is Schaff Trend Cycle (STC)
Most indicators belong to a group of technical tools with similar characteristics. Schaff Trend Cycle is an oscillator, commonly used for identifying overbought or oversold assets. It uses the concept of moving averages (similar to MACD), but in combination with a cycle component for more precision.
If applied correctly, this indicator may help traders see positive and negative trends, as well as find potential entry and exit points for potential deals. Here is an example of its application and possible readings.
How to Read the Schaff Trend Cycle?
There are two baselines: one at 25 and the other at 75. When the indicator goes above the 25 line, it may be considered a bullish trend. If it decreases below the 75 line, it might be viewed as a bearish trend. When STC readings move between these baselines, the trend might be developing in one of the two directions.
In case the indicator creates a straight line above the 75 line, the asset may be interpreted as overbought. Similarly, if a straight line appears below the 25 line, the asset might be oversold.
For step-by-step directions on Schaff Trend Cycle settings, check out this article: Schaff Trend Cycle – Indicator Tutorial.
What is MACD
MACD stands for Moving Average Convergence Divergence. This indicator is quite versatile: it serves as a momentum and also a trend-following indicator. Trading with MACD may help identify trends and assess their strength. Catching these trends (both upward and downward) may provide clues for when to enter or exit a deal.
This indicator creates a pattern consisting of two lines (moving averages). So traders may want to concentrate on the way these two lines behave – on their own and in relation with each other.
How to Read MACD?
The orange line on the graph above is called a slow line (it is calculated based on 26 periods). And the blue one is called a fast line (calculated based on 12 periods). There is also a 0 line – it serves as the baseline.
One approach to using MACD is monitoring the lines’ movements relative to the 0 line. If both lines are above zero for a certain period of time, there might be an uptrend. If they stay below zero for a while, it may be a sign of a downtrend.
Another method of trading with MACD may be waiting for the fast and slow lines to cross. For instance, if the fast line crosses the slow one and goes above it, traders may consider buying. And vice versa: if the fast line crosses the slow line and keeps going down, it might be time to sell.
For details on setting up this indicator you may turn to this article: How to Trade with MACD?
Schaff Trend Cycle vs. MACD
These two instruments work similarly, providing clues to the directions of trend movements. They may both be used to analyze a variety of assets for trading, such as Forex, stocks, commodities, etc. These technical tools might be considered accessible to both novice and experienced traders.
However, there are a few differences that may affect the results of technical analysis. Here are a few factors to help you choose the best indicator for your trading.
Some people (including the indicator’s creator) consider the STC an improved and more precise version of MACD. Both indicators utilize moving averages. However, the STC also uses cycles – repeating patterns that may help catch positive and negative trends. Together with the moving averages, they may possibly provide more accurate results. However, neither can guarantee 100% accuracy every time and should be combined with other tools for better results.
Some traders point out that MACD might be slow to respond to trend changes. It is a lagging indicator, reflecting price changes that already happened. So it may be difficult to apply this tool when looking for early signs of trend shifts.
Conversely, the STC is a leading indicator, intended to show signals for price movements even before they occur. It has an improved signal line that might provide early signs of trend reversals. This may allow traders to react faster and catch the moment to enter or exit a trade. Still, it does not give guarantees of precise entries.
One of the potential issues with some indicators is false positives. With MACD, it may be signs of possible trend reversals that don’t occur. There is also divergence – when the price is moving in one direction and the fast line is shifting in the other. This may be considered a sign of potential trend reversal. However, such signs might be misleading, so traders should keep that in mind when trading with MACD.
In turn, the STC tends to stay in the oversold / overbought sections for extended periods of time. This might sometimes cause traders to miss trend reversal signs.
Generally, you may try using a combination of technical tools to potentially try to avoid false positives. By testing different approaches and indicator combinations, traders might find the suitable ones for their trading method. Here is an overview of the most popular indicator combinations you may consider: 5 Most Popular Indicators Explained in 5 minutes.
Technical analysis using indicators like MACD and Schaff trend cycle may allow traders to possibly identify trend reversals and find opportunities for entries. MACD is a versatile instrument for spotting up and downtrends. Schaff trend cycle may be considered an upgrade of MACD, using cycles to get more accurate signs of trend reversals.
However, neither indicator provides a 100% accurate result. So traders might consider applying them in combination with other instruments to confirm their readings and get more precise results.
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