CCI Trade is a forex strategy based on
Commody Channel Index. CCI is an indicator that is good for measure
of momentum and helps us to optimize best entries in the activity
of trading on the financial markets.
CCI (Commodity channel Index is an
oscillator (mathematical algorithm). CCI is an unbounded range,
typically when your level is above of +100 considered to be
overbought, when your level is below -100 is oversold.
We will use these levels as our
trigger points as we put a twist on the traditional interpretation of
CCI. We actually look to buy if the currency pair makes a new high
above 100 and sell if the currency pair makes a new low below -100.
In “Trade CCI Momentum” we are looking for new peaks or spikes in
momentum that are likely to carry the currency pair higher or lower.
The thesis behind this setup is that much like a body hurtled in
motion will remain so until it’s slowed by counterforces, new highs
or lows in CCI will propel the currency further in the direction of
the move before new prices finally put a halt to the advance or the
decline.
Trade CCI Momentum Buy
1. On the daily or the hourly charts
place the CCI indicator with standard input of 20.
2. Note the very last time the CCI
registered a reading of greater than +100 before
dropping back below the +100 zone.
3. Take a measure of the peak CCI
reading and record it.
4. If CCI once again trades above the
+100 and if its value exceeds the prior peak reading,
go long at market at the close of the
candle.
5. Measure the low of the candle and
use it as your stop.
6. If the position moves in your favor
by the amount of your original stop, sell half and
move stop to breakeven.
7. Take profit on the rest of the trade
when position moves to two times your stop.
Trade CCI Momentum Sell
1. On the daily or the hourly charts
place the CCI indicator with standard input of 20.
2. Note the very last time the CCI
registered a reading of less than -100 before poking
above the -100 zone.
3. Take a measure of the peak CCI
reading and record it.
4. If CCI once again trades below the
-100 and if its value exceeds the prior low reading,
go short at market at the close of the
candle.
5. Measure the high of the candle and
use it as your stop.
6. If the position moves in your favor
by the amount of your original stop, sell half and
move the stop on the remainder of the
position to breakeven.
7. Take profit on the rest of the trade
when position moves to two times your stop.
In this daily chart of the EUR/USD pair
we see that the former peak high above the CCI +100 level was recorded on September 5, 2005, when
it reached a reading of 130.00. Not until more than three months later on December 13, 2005, did
the CCI produce a value that would exceed this number. Throughout this time we can see that
EUR/USD was in a severe decline with many false breakouts to the upside that fizzled as soon as
they appeared on the chart. On December 13, 2005, however, CCI hit 162.61 and we immediately went
long on the close at 1.1945 using the low of the candle at 1.1906 as our stop. Our first target
was 100% of our risk, or approximately 40 points. We exited half the position at 1.1985 and the
second half of the position at two times our risk at 1.2035. Our total reward-to-risk ratio on this
trade was 1.5:1, meaning that if we were merely 50% accurate, the setup would have positive
expectancy. Note also that we were able to capture our gains in less than 24 hours as the momentum of the
move carried our position to profit very quickly.
For those traders who do
not like to wait nearly a quarter of a year between setups, the
hourly chart offers far more
opportunities of the “Trade CCI Momentum” setup. It is still
infrequent, which is one of the reasons that makes this setup so
powerful (the common wisdom in trading is: the rarer the trade the
better the trade). Nevertheless it occurs on the hourly charts far
more often than on the dailies. In the above example, we
look at the hourly chart of the EUR/USD between March 24 and March 28 of 2006. At 1pm on
March 24, 2006, the EUR/USD reaches a CCI peak of 142.96. Several days later at 4am on
March 28, 2006, the CCI reading reaches a new high of 184.72. We go
long at market on the close of
the candle at 1.2063. The low of the candle is 1.2027 and we set our
stop there. The pair
consolidates for several hours and then makes a burst to our first
target of 1.2103 at 9am on March 28, 2006.
We move the stop to breakeven to protect our profits and are stopped out a few hours later,
banking 40 pips of profit. As the saying goes, half a loaf is better
than none,and it is amazing how
they can add up to a whole bakery full of profits if we simply take
what the market gives us.
Here is an example of a
short in USD/CHF trade on the dailies that employs this approach in reverse. On October 11,
2004 USD/CHF makes a CCI low of -131.05. A few days later, on October 14, 2004, the CCI prints
at -133.68. We enter short at market on the close of the candle at
1.2445. Our stop is the high of
that candle at 1.2545. Our first exit is hit just two days later at
1.2345. We stay in the trade with
the rest of the position and move the stop to breakeven. Our second
target is hit on October 19, 2004 -
no more than five days after we’ve entered the trade. Total profit
on the trade? 300 points. Our
total risk was only 200 points, and we never even experienced any
serious drawdown as the momentum
pulled prices further down. The key is high probability, and that is exactly what the “Trade
CCI Momentum” setup provides.
At 9pm on March 21, 2006,
EUR/JPY recorded a reading of -115.19 before recovering above the -100 CCI zone. The “Trade
CCI Momentum” setup triggered almost to the tee five days later at
8pm on March 26, 2006. The CCI value reached a low of -133.68 and we
went short on the close of the candle. This was a very
large candle on the hourly charts, and we had to risk 74 points as
our entry was 140.79 and our stop
was at 141.51. The majority of the traders would have been afraid to
enter short at that time,
thinking that most of the selling had been done. But we had faith in
our strategy and followed the setup.
Prices then consolidated a bit and trended lower until 1pm on March
27, 2006. Less than 24 hours
later we were able to hit our first target, which was a very
substantial 74 points. Again we moved
our stop to breakeven. The pair proceeded to bottom out and rally,
taking us out at breakeven.
Although we did not achieve our second target overall, it was a good
trade as we banked 74 points
without ever really being in a significant drawdown.
Finally, our last example shows how
this setup can go wrong and why it is critical to always use stops. The “Trade CCI Momentum”
setup relies on momentum to generate profits. When the momentum fails
to materialize, it signals that a turn may be in the making. Here is
how it played out on the hourly charts in AUD/USD. We note that CCI
makes a near-term peak at 132.58 at 10pm on May 2, 2006. A few days
later at 11am on May 4, 2006, CCI reaches 149.44 prompting a long
entry at .7721. The stop is placed at .7709
and is taken out the very same hour. Notice that instead of rallying higher, the pair reversed
rapidly. Furthermore, as the downside move gained speed prices reached a low of .7675. A trader who
did not take the 12-point stop as prescribed by the setup would have learned a very expensive
lesson indeed as his losses could have been magnified by a factor of three. Therefore, the key
idea to remember with our “Trade CCI Momentum” setup is - “I am right or I am out!
How can you improve this forex
strategy?
adding 2 exponential moving averages.
The new setup of this strategy is as
follows (h1 time frame)
CCI 20 periods,
EMA 9 periods ,
EMA 21 periods.
H4 and daily time Frame setup is:
CCI 20 periods,
EMA 6 periods,.
EMA 13 periods.
Buy
The same previous rules but with
conditions That 9EMA> 21 EMA.
Sell
The same previous rules but with
conditions That 9EMA< 21 EMA.
To see example
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| Trade CCI Momentum |
For a more aggressive trading this
strategy can be summarized in the following way:
Buy
CCI> 100 and 9EMA> 21EMA;
Sell
CCI <-100 and 9EMA <21EMA
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trade CCI Momentum
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