CCI Trading Strategy.
Despite being called the Commodity Channel Index (CCI) this indicator is not just for commodities. It can be used for all markets. The CCI is an indicator which oscillates back and forth, above and below zero. It can be used in multiple ways; here are two strategies that utilize it.
Basic CCI Strategy.
The developer of the CCI, Donald Lambert, created a basic strategy for the indicator.
When the CCI moves above +100 it means the price is trending strongly, and therefore triggers a buy signal. The trade is held until the CCI drops back below +100.
When the CCI drops below -100 a strong downtrend is in place, and therefore triggers a short sell (put) signal. The short trade is help until the CCI rallies back above -100.
Entries could also be used with binary options, although some testing and monitoring of volatility would be required to estimate the ideal expiry time for various financial instruments.
Figure 1 shows this basic strategy applied to a 5-minute stock chart.
Figure 1. Apple (AAPL) 5-Minute Chart with CCI Trades.
In the example above the strategy worked well, although it can be prone to triggering false signals. Therefore, there is another variation to the strategy. Some traders may prefer the simplicity of the first strategy and choose to make their own adjustments to it if they wish. Other may prefer the next strategy which is a little more complex but may provide better entry points.
“Double Time” CCI Strategy.
The double time strategy uses two timeframes; a longer time frame to establish the trend and a shorter time frame to spot pullbacks.
Figure 2 shows the same trading day in Apple, except using a 15 minute chart.
Just after the open the CCI moves above +100 and stays above it for the next several hours.
Because the CCI is above +100 on the 15-minute chart (longer time frame), that means we are only looking for long/buy entry points.
To find the entry points we use a shorter time frame, such as a 1-minute chart.
A signal occurs on the 1-minute chart when the CCI moves below -100 and then crosses back into positive territory (zero line).
Remember the main trend is up as shown by the 15 minute being above +100. We use the 1-minute chart to find pullbacks or oversold conditions in that longer-term trend. We then use those pullbacks to buy. When the CCI on the 1-minute chart moves below -100 it indicates a pullback. When the CCI (on the 1-minute chart) moves back above 0 (zero line) it indicates the pullback has ended and the trend is resuming.
Figure 3 shows the entries into the longer-term uptrend using the 1-minute chart.
The entries using this strategy do fairly well at picking low points before the trend resumes. The entries are more favorable than using the basic strategy.
Use the 1-minute chat to also exit trades. Exit a trade after it crosses above +100 on the 1-minute chart and then moves below the zero line.
Figure 4 shows the exits, marked with vertical on the price charts.
If the CCI is below -100 on the 15-minute chart, that means we would only look for shorting/put entry points.
A signal occurs on the 1-minute chart when the CCI moves above +100 and then crosses back into negative territory (zero line). Exit when the 1-minute CCI moves below -100 and the crosses back into positive territory (crosses above zero line).
Tying it Together.
The strategy is not designed for precise timing, which means if you are trading binary options you will need to test out the best expiry time to use with the strategy, based on the instrument’s (stock, forex pair, commodity, etc) volatility.
I have made the rules fairly strict, in that you only take long positions if the 15-minute chart is above +100. You may wish to relax this, and take longs if the 15-minute CCI is above 0. Similarly, I originally said only take shorts if the 15 minute CCI is below -100. If you find it prudent to do so, you may take wish to trade shorts as long as the 15 minute CCI is negative.
If you are trading traditional markets the strategy doesn’t utilize a stop loss–entries and exits are all based off the indicator. This exposes a trader to potentially large losses on a quick move. Therefore it is recommended a trader employ some sort of stop loss order. For example, with longs place a stop just below a former swing low in price. For short, place a stop just below a former swing high in price.
Test out the strategy before implementing it and come up with personal guidelines on how to employ the strategy if the concept of it appeals to you.
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CCI Trading Strategy.