Commodity Channel Index Strategy – How to Use the CCI in Forex Trading.
This is the second article in our CCI series. If you haven’t already we suggest that you check out the first article about the CCI Indicator. In that article, we covered the background of the “Commodity Channel Index”, or “CCI”, indicator, how it is calculated, and how it looks on a chart. The CCI measures the difference between the mean price of a currency and the average of the mean price over a chosen period of time. Traders use the index to determine overbought and oversold conditions and the beginnings and endings of cycles in the forex market.
The CCI is classified as an “oscillator” since the majority of values fluctuates between values of “100” and “-100”. The indicator typically has lines drawn at both the “100” and “-100” values as warning signals. Values exceeding these boundary limits are interpreted as a strong overbought condition, or “selling” signal when over “100”, and if the curve dips below “-100”, a strong oversold condition, or “buying” signal, is generated.
How to Read a CCI Chart.
The CCI with a period setting of “14” is presented on the bottom portion of the above “15- Minute” chart for the “GBP/USD” currency pair. In the example above, the “Red” line is the CCI. It attempts to mimic the cycle of the underlying currency and to alert when cycles are due to reverse.
The key points of reference are when the curve cross the “100” and “-100” boundary limits. The “CCI Rollercoaster” tends to work better when the period setting is approximately one-third of the related cycle. However, determining cycles in forex markets are difficult, the reason for the inconclusive series of signals during the first part of the chart. For these reasons, it is always prudent to complement the CCI with another indicator.
As with any technical indicator, a CCI chart will never be 100% correct. False signals can occur, but the positive signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding CCI signals must be developed over time, and complementing the CCI tool with another indicator is always recommended for further confirmation of potential trend changes.
In the next article on the CCI indicator, we will put all of this information together to illustrate a simple trading system using this CCI oscillator.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.
Strategy Series, Part 3: The CCI Swing.
by Walker England.
Day traders can look for retracements CCI can be used to find short term swings Using a trail can allow a position to move with the trend.
Trading strategies can come in all shapes and sizes. The good news is whether you are a day trader or position trader you can enter the market on retracement swings. In our previous strategy session, we reviewed trading intermediate time frames with the “ Easy MAC ” strategy. Today we will continue our conversation, by reviewing swing trading for day traders using the “CCI Swing” strategy for trending markets. Let’s get started!
Find the Primary Trend.
The “CCI Swing” approach is a retracement strategy used primarily for day trading trends. It is therefore import to find the markets current direction. This strategy will use trend identification and multi time frame analysis. To begin traders will need to identify the primary trend on a 30 minute chart. A 200 MVA (Simple Moving Average) will be used for this; traders should note whether the trend is above or below the MVA.
Below we can see an example of the 200 MVA at work on a USDJPY chart. The trend is considered to be down because price is below the 200 MVA. Keep this in mind, because if prices were instead above the 200 EMA the pair would be considered in an uptrend. Once the primary trend is found, we can move forward to validate the information.
Multi Time Frame Analysis.
Next traders will validate the markets direction on another time frame. This process is called multi-timeframe analysis. For the “CCI Swing” strategy we will now drop down to a 5 minute chart for this process. In order to validate the trend, price must be on the same side of the moving average for both charts. If the time frames do not validate each other, traders should look for another chart to trade.
Below we can again see the USDJPY, this time on a 5 minute chart. The trend is once again considered to be down, as price remains below the 200 MVA. Thus, the 5 minute chart has effectively validated the primary downtrend originally identified on our 30 minute chart. Since prices are not mixed, as both remain below the 200 MVA, we will move forward with the execution portion of the strategy.
Once the trend is identified and validated, it is time to plan a market entry. To begin we will now add a 20 period CCI indicator to our open 5 minute graph. The idea here is that we will use overbought and oversold signals to enter into a trade on an intraday retracement. In a downtrend, traders will wait for CCI to become overbought, then enter into the market when the indicator moves below +100. Conversely in an uptrend, traders will buy when CCI moves back above an oversold value of -100.
Below, we can see a sample sell signal for the USDJPY. When CCI swings back below +100 this strategy calls for the trader to sell 2 lots. Position size will vary according to your account balance, but net exposure should not exceed more than 1% of your total account balance across both positions.
Managing Exits and Risk.
As the final step, traders must know where to exit the market and how to manage risk. When it comes to the “CCI Swing” strategy, this process again uses the 200MVA (5minute chart) and a trailing stop. First a hard stop for one lot is placed at the 200 period MVA. This distance should be measured and a one to one risk reward ratio should be used for take profit targets on this lot.
The second lot of this strategy will utilize a trailing stop. This stop should be attached to the 200 MVA just as the first lot. However, this order will have a fixed trail. This means if you have a stop of 25 pips, your order should tail every time the pair moves 25 pips in your favor. By design this stop will continue moving forward as long as the trend continues!
Learn More Strategies.
The “CCI Swing” retracement trading strategy is just one installment of an ongoing article series on market strategies. If you missed one of the previously mentioned strategies, don’t worry! You can catch up on all of the action with the previous articles linked below.
---Written by Walker England, Trading Instructor.
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Using the CCI Indicator to Find and Filter Trades.
The Commodity Channel Index (CCI) measures variation between an assets current price, and its average price. Don’t let the “commodity” part of the name mislead you; the indicator can be used for trading other markets, not just commodities. As with all trading indicators, I don’t advocate using it to generate trade signals on its own. Look at the overall price trend first, and then look to the indicator for confirmation or trade signals that align with the trend. By doing this you’ll avoid many of the false signals that the indicator ( all indicators) generates. Here’s how the CCI works, and how to use it for trading.
The CCI measures how far above or below the current price is from its statistical average. The indicator typically fluctuates between -100 and +100; when the value is greater than +100 the price is considered high relative to the average price, when the value is lower than -100 the price is considered low relative to the average. Traders will often refer to the regions above +100 and below -100 as being “overbought” and “oversold.”
The “average price” is calculated over 14 periods (default indicator setting), but this can be adjusted slightly based on your market and strategies.
The CCI can be used all time frames, from 1 minute to monthly charts.
Figure 1. GBP/JPY 15 Minute Chart with CCI Indicator.
Using the terms overbought and oversold is misleading though. Novice traders typically want to go short/buy puts when the indicators enters overbought territory, and go long/buy calls when the indicator is in overbought territory. Do this though and you’ll likely drain your account; I prefer the following method.
How to Trade with the CCI Indicator.
The main problem with just looking at overbought and oversold levels is that the trend is not considered. Consider a strong uptrend; during a strong uptrend you will get lots over overbought readings because the price is climbing, continually moving above the historic average price. Yet, if you go short (buy puts) based on the overbought reading, you’re fighting the trend. The price may pullback temporarily, but the trend will often resume and you’ll likely be left with a string of losing trades.
Instead, use the indicator in conjunction with the trend. Watch for oversold readings during an overall uptrend to signal a potential buying (call) opportunity. Watch for overbought readings during an overall downtrend to signal a potential shorting (put) opportunity.
Figure 2. Look for Overbought Levels During Downtrend.
In figure 2 I have drawn a trendline to show the trend is down. You may also choose to add a moving average to your chart, or draw support and resistance levels to help see the trend.
Figure 3. Oversold During Uptrend.
Figure 3 has a 50-period moving average, and I have also drawn horizontal lines showing where I expected support to develop. As the price pulls back toward the moving average and price support region, the indicator enters oversold territory. As the price begins to rise again there is an opportunity to go long (buy call) will minimal risk.
To help improve timing, I prefer to enter trades once the CCI moves back above -100 (for buy/call trades in uptrends) or back below +100 (for short/put trades in downtrends). So in Figure 3, you’d hold off on taking the long trade until the CCI moved back above -100.
A drawback of this strategy is that you may not get a trade signal if the trend is very strong. For example, during a surge higher, the price may not pullback far enough to create an oversold reading on the indicator. If you rely solely on the indicator for your trade signals you may miss out on a high profit/high probability move.
No strategy is perfect though, so if you like the strategy stick to it, and don’t worry about the trades you may miss.
Also, if you just look for overbought and oversold levels in uptrends and downtrends, your trade entry timing may still be poor. This is because overbought and oversold can last for a long time. This drawback can be somewhat alleviated by adhering to the timing guideline above: enter trades once the CCI moves back above -100 (for buy/call trades in uptrends) or back below +100 (for short/put trades in downtrends).
Use the CCI indicator in conjunction with trend analysis to isolate low risk trading opportunities. Watch for oversold levels on the CCI when the price is in an uptrend–these are buying opportunities. Watch for overbought levels on the CCI when the price is a downtrend–these are shorting opportunities. Use trendlines, moving averages or support and resistances to help determine the trend direction. Don’t be misled by labels such as “overbought” and “oversold,” because during a strong uptrend the market is almost always overbought, and during a strong downtrend, always oversold. Finally no strategy is perfect, but it doesn’t have to be. If you like the strategy, try it out on a demo account until you are comfortable spotting trades and making a profit, only then should you utilize it using real funds.
A Simple CCI Strategy for Scalpers.
by Walker England.
Traders should find the trend to form a trading bias CCI can be used to identify market entries Traders should manage risk in the event of a trend shift.
One of the hardest steps a trader must take before scalping their favorite Forex pair is creating a strategy. While strategies can range from the complex to the mundane, creating a plan for trading the market does not have to be needlessly complicated. Today, we are going to review a simple three step CCI (Commodity Channel Index) strategy that can be used for scalping trending Forex currency pairs.
So let’s get started!
The first step to trading any successful trend based strategy is to find the direction of the market! The 200 period EMA (Exponential Moving Average) is an easy to read indicator for this purpose. Traders can add this indicator to any graph with the intent of finding if price is above or below the average. If price is above the EMA, traders can assume that the trend is up while looking to initiate new buy orders. Below, we can see a 5minute NZDUSD chart accompanied with the 200 period EMA.
Given the information above, traders should look to buy the NZDUSD, as long as it remains trending higher above the EMA. It should be noted in the event of a downtrend (price under the EMA), traders will look to sell as price decreases.
Learn Forex –NZDUSD with 200 EMA.
(Created using FXCM’s Marketscope 2.0 charts)
Once a trader has identified the trend and created a trading bias using the 200 period EMA, traders will begin looking for ways to time their market entries. Using a technical indicator is a favored choice for this task, and the CCI (Commodity Channel Index) oscillator can be added to your graph for this exact purpose. Below, we can again see the NZDUSD 5minute graph, this time with the CCI indicator added. With the NZDUSD trading in an uptrend, traders will look to buy a retracement when CCI signals momentum returning back in the direction of the trend. This occurs when the indicator crosses back above an oversold value of -100.
The CCI crossover from today’s trading shows exactly how traders can time their entry with the indicator. It should be noted again that only buy positions are being taken during this uptrend. This is just one of many ways you can use CCI in an active trading plan.
Learn Forex – NZDUSD & CCI.
(Created using FXCM’s Marketscope 2.0 charts)
As with any active market strategy, scalping Forex carries risk of loss. Because of this, traders should always consider their exits as well as their entries. Scalpers can use a swing low or even the 200 period MVA as places to set stop orders . In the event that the NZDUSD begins creating lower lows, traders will wish to exit any existing long positions and look for other opportunities.
---Written by Walker England, Trading Instructor.
To Receive Walkers’ analysis directly via , please SIGN UP HERE.
Interested in learning more about Forex trading and strategy development? Signup for a series of free “Advanced Trading” guides, to help you get up to speed on a variety of trading topics.
Register here to continue your Forex learning now!
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Upcoming Events.
Forex Economic Calendar.
Past performance is no indication of future results.
DailyFX is the news and education website of IG Group.
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