CCI Indicator Trading Strategies

Posted in: Trading Article

The CCI indicator, the commodity channel index, is a momentum based indicator that falls under the oscillator classification.  The CCI oscillates between several levels including:

  • +100
  • -100
  • 0
  • +200
  • -200

These levels are often used as overbought and oversold levels.  The +100 would be considered overbought as an example.  A move below 100 would be used as an oversold condition.

From there, traders expect a retrace in price and often look for reversal trades.

Donald Lambert, the designed of the indicator, actually used extreme readings such as +100 or -100 as signs of a strong/weak market.  He would then look to establish a trading position in that direction.

While oversold and overbought levels were not the intention of the CCI, many traders in Forex use those market states as the basis for a trading strategy.

 

CCI Indicator Settings

Like many trading indicators, the CCI has certain variables that can be changed depending on the trading strategy:

  • Look-back Period:  Usually 14 and 20, this is the number of periods prior to current that the indicator will use in the calculation.  50 can also be used.
  • Levels:  These are the +100, -200, 0, levels that can be changed depending on the back testing results of the trader
  • Price Source:  While many indicators use the closing price, the CCI will use the average price of 3 prices: [(High + Low + Close)/3] as part of the calculation

From there, the calculation of the CCI (is using a 14 period setting) will be:

CCI = (Typical Price – 14 Period SMA of Typical price) / (.015 x Mean Deviation)

Typical Price = (High + Low + Close)/3

The calculation that includes the .015, is designed to ensure that the majority of the time, the levels of +100 and -100 contain price.

 

Using CCI For Momentum

The indicator can be considered a detrended moving average oscillator.  To explain what that means may and give you a possible “AHA” moment, let’s look at a chart.

CCI INDICATOR

I have plotted a 20 period simple moving average on price and the CCI 20 in the lower pane.  A few things you should notice to understand how the CCI works:

  • The green arrows show where the CCI is crossing the zero line.  Look at price crossing or hovering near the zero line
  • The green arrow are extreme price moves.  Notice how far and fast price pulls away from the SMA and the CCI reading

What you may want to consider is the CCI is measuring how fast/far price moves away from an average price.

The further price moves away, the faster price moves away, this is how momentum is measured.

  • Price that is hugging a moving average is not showing momentum
  • Price pulling from an average price is showing momentum
  • CCI measures, via the levels, the strength of the momentum in the market

In essence, we are looking at the CCI as a means to gauge to see where price is in relation to a moving average.  From there, we can determine if a market has momentum and is worthy to trade.

 

50 CCI + 34 EMA Trading Strategy – Trend Direction Change

The first CCI trading strategy is trading a trend direction change using:

  • CCI 50 – paying attention to the zero level
  • CCI 14 – paying attention the the +100 and -100 levels
  • 34 EMA

This is a 15 minute chart of crude oil futures which is a preferred day trading market here at Netpicks.

CCI DAY TRADING CHARTTrading Rules

  1. Long trades:  Price must cross and close above the 34 EMA and the 50 must cross the zero line
  2. Check the 14 to ensure it is above the zero line.  You could enter at close or break of highs
  3. Short trades:  Price must cross and close below the 34 EMA and the 50 CCI must have crossed below zero
  4. CCI 14 must already be on the downside of the zero line

Stops and Targets

There are many ways to place a stop loss and some traders may choose to place their stop a few ticks/pips/points below the candlestick that sets up the trade entry.

Profit targets can be a multiple of your risk or you may choose to trail and scale out at certain chart points.

Traders may also decide to exit when the indicator turns down (up) from the 100 levels.  If you find price moving with momentum and the CCI not looking back after crossing the 100 levels, this may be a great trailing stop opportunity.

 

Trading The Trend Change Pullback Strategy

This is a more conservative approach which would require some type of pullback in price or the CCI.  The reason is that trend changes can be messy or fail and this method will use a standard market mechanic – pullbacks in price.

This is a four hour chart of a Forex pair and will show both long and short trades.

I will also show the original trade using the trend change method and the pullback trading strategy.

CCI TREND CHANGE STRATEGY

Explanation and Pullback Rules

  1. This is our standard trend change strategy and while we did get a push to the upside, price reversed and the 50 CCI dropped below the zero line
  2. This is another trend change trade and although the zero line is not on the 14 CCI, it has crossed.  This trade does sit through 16 hours of chop.
  3. Here is the first pullback trade and can be used as an add-on or a standalone entry.  The 50 CCI has bounced off the +100 level (or the zero level is fine) and price has stalled near the 34 EMA.  Your trade entry can be when the 14 CCI crosses back over the zero line which is this example
  4. This is the standard trend change entry
  5. CCI 50 is bouncing off the -100 line zone, the 14 CCI is bouncing off the zero line, price is bouncing off the 34 EMA
  6. CCI 50 stays below zero line, the 14 CCI crosses up and over the +75 line, you can enter when the 14 CCI crosses back under the zero line

What we are looking for in a pullback trade are a few things:

  • We need to see 50 CCI stay on the same side of the zero line.  If it crosses, we revert back to the original trend change rules.
  • The 50 can bounce off the +100 line or the zero line once price direction is established (long trade, reverse for shorts)
  • The 14 can bounce over the zero line to the opposite 75 level  (+or -) and crossing back over zero is the trigger
  • If the 50 stays above +100 for a long trade, the 14 CCI crossing under the +100 line and back again is a trigger

The stops and profit targets will be the same for these trades as well.

All we are doing is allowing the trend to change, evolve, and trading the first pullback in the trend.

Why?

If a trend is not going to establish, the first place it will fail is in the first pullback where price fails to make new highs or lows.

Keep in mind while we can use the CCI for trade triggers, many traders who understand price action will use the signs the market is giving.

 

Using Price Action With CCI Pullbacks

Using price action along with CCI can form the basis of a profitable trading strategy.

With price action, we are looking to get into a position earlier than a lagging indicator like the CCI will get us in which can allow us to be in positions before momentum picks up.

This is the same chart as the last example and I have focused in on two areas.

PULLBACK TRADING COMMODITY CHANNEL INDEX

On the left, we can see upside momentum stalling as we pull back into the EMA.  The noted candle is an inside candlestick which means volatility compression.  If you were to drop to a lower time frame, you would see a range forming.

Traders can position inside the range or set an order to short if/when price breaks out the bottom of the range.  In doing so, in this example, you participate fully in the momentum push down.

On the second example, we can see the range forming.

Also note:

  • Price based near resistance which is bullish over a large sample of trades
  • Price fails to break out of the short term range
  • Price wipes out the previous 7 days of price action
  • Inside bar is volatility compression where you’d see a range on the lower time frame.  Since we are bearish, we’d set a sell stop order at the bottom of the range

As with any trading strategy, I prefer using price action alongside an indicator for any trading decisions.  There are plenty of trading articles on this blog that covers many types of price action trading skills.

You can also use various forms of technical analysis including trend line breaks on the bull flags and bear flags that form in the pullbacks for your trade entry.

 

CCI Trading Strategy – Continuation Trades

While the word continuation could apply to the trend change pullback strategy, we should focus on the intention behind the trade.

In this continuation strategy, we look to take advantage of a trend that is maturing and position in that trend.

  • We want the instrument to have changed trend and gone through the first pullback
  • The 50 CCI must stay on the right side of the zero line
  • 14 period CCI must dip below -75 for long trades
  • Enter when CCI crosses zero line

This is a stock chart of NKE and is the 15 minute chart for day trading.

STOCK CHART

On this chart, we’ve had the trend change as well as the first pullback after the change.

  1. 14 CCI has dipped below the -75 line and upon crossing over the zero line, you enter long.
  2. Once the CCI drops back under the zero line, we can exit.  This chart has $1.46 a share profit.
  3. The 50 CCI is still on the long side and the 14 CCI crosses back over the zero line.  Trade entry.
  4. The 14 period CCI drops below zero where we exit for a $1.45/share profit

Interesting to note that the CCI crossing zero would have you exiting prior to the gap down in price.

 

In Conclusion

These Commodity Channel Index trading strategies are worth your time to back test and show yourself the potential of using the CCI indicator

Experiment with different stop loss locations as well as ways to maximize the profit on each trade.

Trading multiple contracts can aid you in scaling partial positions while leaving enough on the table if/when price begins to run.

As with all trading strategies, ensure you make a trading plan and be consistent in following it.  You will win.  You will lose.  Accept the losses and keep executing the trading plan.


Using Candlesticks In Addition To The
CCI Indicator May Boost Your Results.

Download Your Free Guide
trading candlestick reversals

 

 

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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