Schaff Trend Cycle Strategy

Introduction

The strategy to be discussed is a strategy which seeks to identify trends which occur in a cycle. The time frame for this strategy is the 15-minute time frame and the strategy can be used on any currency pair.

Indicators
This strategy will use the following indicators:

  1. Schaff Trend Cycle Indicator: This is a customized momentum indicator which displays oversold and overbought market conditions. The indicator can be downloaded from here and loaded into the data folder of your MT4 client. By now you must have known how to do this from reading our other strategy articles.
  2. Stochastics oscillator set to 21,9,9.
  3. 100-period exponential moving average

The Strategy

This strategy is all based on finding and following the trend. The Schaff indicator behaves in a way like an oscillator, identifying overbought and oversold conditions in the market. These scenarios are then used to trade price reversals. A modification of the simple overbought or oversold trade setup is the addition of the 100-period exponential moving average, which is used by institutional traders as a very powerful support-resistance tool. The Stochastics oscillator is used to add confirmation to the trade entry.

The trade is therefore to trade a reversal of price action following oversold or overbought market conditions, and enter the trade when the price action is able to break through the 100-period exponential moving average, which will serve as support for falling prices and resistance for rising prices. The long and short trades are described below.

1) Long Trade
The long trade scenario is setup when the following occurs:

  1. The 100-period EMA is seen to be pointing upwards.
  2. The Stochastics lines have crossed at oversold levels
  3. The Schaff indicator line has breached the oversold level and has turned up to be above the +10 mark.

The long entry is made when the price action breaks above the 100EMA line with a slight pullback, following the satisfaction of the three entry pre-conditions stated above.

Schaff_long

We can see the area where the price action broke the 100 EMA line upwards (brown circled area), in the presence of other entry parameters for the long trade.

Stop Loss

The stop loss is set a few pips below the 100EMA line. A broken resistance will turn into a support which then rejects any pullbacks below the 100EMA line. Thus the stop loss can be made as tight as possible.

Take Profit

The take profit point is not set when the trade is made. Rather, the trader can decide to close the trade manually when the price action reaches overbought areas (Schaff indicator is at or above 90).

2) Short Trade
The short trade scenario is setup when the following occurs:

  1. The 100-period EMA is seen to be pointing downwards.
  2. The Stochastics lines have crossed at overbought levels
  3. The Schaff indicator line has breached the overbought level and has turned downwards to be below the +90 mark.

The short trade entry is made when the price action breaks above the 100EMA line with a slight pullback, following the satisfaction of the three entry pre-conditions stated above.

Schaff_short

We can see the area where the price action broke the 100 EMA line downwards (purple circled area), in the presence of other entry parameters for the short trade. This trade did not take off immediately and it took a few candles before the price action decided to move down south. However, price action eventually moved down south and was able to deliver on the trade expectation.

Stop Loss

The stop loss is set a few pips above the 100EMA line. This is because a broken support turns into a resistance and when the price action breaks below this line, a pullback will be rejected at this line, thus allowing the stop loss to be made tighter.

Take Profit

The take profit point is not set when the trade is made. Rather, the trader can decide to close the trade manually when the price action reaches oversold areas (Schaff indicator is at or below 10).

Conclusion

Support and resistance trades allow for traders to place tight stops, leaving room for unlimited profit potential. The ability of two momentum indicators to identify oversold and overbought market conditions will allow the trader to follow the trade reversals to their logical conclusion.

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