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How the Pro’s Trade Using the CCI Trading System
How the pro’s trade using the CCI trading system is very easy to understand. In this article, you will also learn about the CCI indicator and why it is useful in your trading. If you want to break from the crowd mentality and join the professional traders then what you’re about to learn next will grab your interest. Long-term profitability demands different types of trading skills that our CCI trading strategy PDF will reveal to you next. You can also read Trend Line Drawing with Fractals.
One of the fundamental trading principles that our team at Trading Strategy Guides religiously follows is to trade in the direction of the dominant energy of the market. This is really important, so make sure you commit this to memory.
But how do we determine the dominant energy of the market?
That’s where the CCI indicator strategy comes in and the price action as well.
Moving forward, we’re going to talk about the CCI indicator also known as the Commodity Channel Index; we’ll explain the theory behind CCI, and then highlight some real trade examples to show you how the CCI works. We also have training on how to use currency strength for trading success.
What is the Commodity Channel Indicator (CCI) indicator?
The CCI indicator was created by Donald Lambert and was initially used to identify cycles in the commodity market. However, it tends to perform the same in the stock market or the Forex currency market and even the cryptocurrency market for that matter.
As you may guess by now, the only indicator you need to spot new market cycles is the CCI indicator.
The CCI indicator strategy was really designed to find cyclical trends in the market and to be used as a bearish or bullish filter. The CCI is simply an oscillator indicator that moves the majority of the time between +100 and -100.
Technically, the way to interpret the Commodity Channel indicator is that a positive reading above +100 is a bullish signal and a start of an uptrend, while a negative reading below -100 is a bearish signal.
You have to keep in mind that technical indicators are just mathematical equations. However, the CCI is a leading indicator which means it doesn’t lag behind the price.
Moving on…
Let’s see how to read the CCI indicator if you’re a complete beginner.
This is an alternative method to analyze any market.
See below:
How to Trade CCI Indicator
The zero line in the CCI indicator is the line in the sand between the bulls and the bears.
This means that we can use the crossing of the zero line to gauge a shift in the market sentiment.
So, here is how to trade using CCI indicator:
- When the CCI oscillator crosses from below the zero line that’s signalling a shift from bearish momentum to bullish momentum.
- Conversely, when the CCI oscillator crosses from above the zero line that’s signalling a shift from bullish momentum to bearish momentum.
Here is an example:
Now, we don’t recommend completely relying on these signals alone. You need to use them in combination with your price action reading skills.
Moving on…
If you want to dive deep into the math behind the CCI indicator read on.
How is CCI Indicator Calculated?
The CCI indicator formula is:
CCI = (Typical Price – 20-period SMA of TP) / (0.015 x Mean Deviation)
Where:
Typical Price (TP) = (High + Low + Close)/3
The reason why the CCI formula uses a constant of 0.015 is to ensure that the CCI value would not fall between -100 and +100 that often. But, of course, that the CCI values are dependent of other variables such as the look-back period.
In this regard, the bigger the look-back period is, the higher percentage of the CCI values would fall between -100 and +100. This is something to keep in mind when you sent the CCI indicator settings.
Moving on…
Let’s examine 3 reasons why traders should start using the CCI indicator.
See below:
Why use the CCI Indicator?
One sweet way the CCI indicator can help you trade trends.
But, there are other usages of the CCI indicator like:
- Overbought signals
- Oversold signals
- Divergence
Here is an example:
Like any technical indicator, the CCI indicator also has some limitations. So, make sure you don’t randomly take the CCI signals.
To help you out here is a simple CCI day trading strategy that you can use
See below:
How to use CCI indicator for Day Trading
Day trading requires active trade management. So, due to the high risk associated with day trading, you need to implement trading practices that are suitable for that type of trading style.
Different traders can use the CCI indicator in different ways.
However, here at Trading Strategy Guides, we have developed a day trading CCI strategy using only 5 conditions:
- The preferred time frame the 5-minute chart
- To eliminate most of the intraday noise we’re going to use the CCI values of +200 and -200
- Wait to have two consecutive overbought (oversold) readings on the CCI indicator above +200 (below -200)
- Look for divergence between the price and the CCI indicator
- Wait for the CCI to cross below +100 (above -100)
Here is an example on the Bitcoin chart (buy rules):
The CCI reached the -200 level twice.
If you would have taken the first signal the first time the CCI indicator reached the -200 level, you would have lost money. Hopefully, you can see now why we wait for two consecutive oversold readings to buy.
This is a safe way to protect your capital and limit your losses in the long run.
It’s better to trade safely than to be sorry later.
Now, this is not enough to enter a trade.
So, we go one step forward to find an entry signal day trading with the CCI.
The second condition is that we need divergence between the CCI and the price.
In other words, we need the price to make lower lows while the CCI indicator has to do higher lows. In an uptrend, we would look for higher highs in prices and lower highs reading on the CCI indicator.
See the chart below:
Now, just because we have divergence between the price and the CCI it’s still not enough for us to risk our money on this trade.
We need more confluence, which brings us to the next condition that needs to be satisfied.
Wait for the CCI to cross above the -100 level to pull the trigger on your order.
When the CCI crosses above the -100 level we know that the market is starting to shift to the upside. In this regard, we don’t want to lose any more time and we jump into the market knowing that we have multiple factors in our favor.
See the example below:
Now, day trading is all about getting in and out of the market fairly quickly.
In this regard, we need a proper exit strategy.
So…
Once the CCI crosses above the +200 level we take whatever the market has given to us and close the trade.
See the chart below:
A good trading tip on how to use the CCI indicator is in conjunction with chart analysis, which is the central theme of this CCI trading strategy PDF. Here is an approach to currencies by Warren Buffett.
Now, here is the way we’re going to use the CCI trading strategy PDF:
The CCI trading system doesn’t look for overbought and oversold signals. You have to understand that when we’re above +100 CCI reading that is actually showing strength. In other words, the dominant market energy is to the upside.
Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of this entry method. Also, read trading discipline which is also a most important skill for successful trading.
For this article, we’re going to look at the buy-side.
Step #1: Wait until the CCI indicator crosses above +100 level
When we get a CCI reading above the +100 level, that shows statistically the EUR/USD gained more strength than average and therefore great for buying opportunities.
As a leading indicator, the Commodity Channel indicator can provide us with excellent great trade signals.
When the CCI crosses for the first time above the +100 level that’s the signal that a new bullish trend is about to start or at least a rally will emerge from where you can extract sound profits.
We’re still not ready to trade yet.
There is one more trading condition that needs to be satisfied before pulling the trigger.
See below:
Step #2: Wait for a retracement and make sure that during that retracement the CCI indicator holds above the zero line.
Waiting for a pullback in price is a more defensive trading approach. However, you can also buy right away when the CCI crosses above +100. In this case, you need to make sure enough time has elapsed between now and the last time the CCI passed above +100.
We’re going to apply the more conservative approach and wait for a retracement and the CCI indicator to hold above the zero line during this retracement.
Here is the key.
We want to see a weak retrace in the CCI indicator that barely goes below the +100 level, but at the same time, we need to look at the price action retracing more than the CCI did.
We want to have strength to the upside if we’re going to buy EUR/USD and we want to see continued strength in the CCI reading when the price is pulling back.
When the retracement happens, it’s important for the CCI indicator to remain above the zero line. If the CCI crosses below the zero line during the retracement, we’re no longer interested in going long EUR/USD.
This is one perfect example of how to filter bad trades from the right trades.
Note* The less the CCI turns down, the more powerful the rally should be.
The next step will highlight the trigger for our entry order.
See below:
Step #3: Buy after 3 or 5 candles “worth” of retracement. Or, sharp Corrections are bought at the closing price.
Now, we’re looking for long trades.
We have two options for our entry strategy.
We either buy after we have seen the market pulling back over the last 3-5 candles or we buy straight away if we have sharp corrections.
The natural ebb and flow of the market are given by these short-term pullbacks that we’re going to use to trigger our entry.
If the retrace was weak, it means the dominant energy of the market remains up. The CCI indicator strategy reflects quite well what is happening behind the scene where the actual buying and selling pressure takes place.
This brings us to the next important thing that we need to establish for the CCI trading strategy, which is where to place our protective stop loss.
See below …
Step #4: Place your protective Stop Loss below the most recent swing low
We’re proposing a very easy strategy to manage your stop loss. Simply place your protective stop loss below the most recent swing low.
However, it’s important to also watch the CCI indicator for further clues of weakness, and if the CCI crosses below the -100 level after you’ve entered the market, you can close the trade at the market price if your stop loss wasn’t triggered in the process.
Last but not least, we also need to define where we take profits when trading with the Commodity Channel Index indicator.
See below:
Step #5: Take profit if CCI touches 200 or if CCI drops below the zero level. Whichever happens first.
We have two trading tactics to implement when dealing with exits.
The more profitable exit strategy is to take profits when the CCI touches the +200 level. However, since the market will only occasionally give us such big trading opportunities we need to have a backup plan.
So….
As soon as the CCI indicator turns below the zero level, we want to exit our trade. The first sign that the rally is running out of steam is when the CCI indicator crosses below the zero line.
Note** the above was an example of a BUY trade using our CCI trading strategy PDF. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.
The overarching principles of the CCI strategy can be applied to your own trading strategy as well. All markets move in cycles, so we recommend using the CCI indicator in combination with higher time frames as this will yield better trading performance according to our backtesting results.
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