Best Forex CCI Trading Strategy (Commodity Channel Index Explained For Beginners)

What’s up Traders, in this article, we’re going to be talking about Best Forex CCI Trading Strategy (Commodity Channel Index Explained For Beginners).

In this article I will reveal an effective trading strategy involving the commodity channel index, strategy which i mainly used when I’m trading stocks. 

The CCI is an oscillator used in technical analysis in order to measure the variation of a stock’s price from its statistical mean. High values indicate that prices are unusually high compared to average prices. 

Low values of the CCI indicate that prices are unusually low. CCI is one of the most popular indicators and traders always tweak the settings of the indicator, depending on their favorite time frame or trading style. 

 

Most common CCI setting

 

• CCI Trading Strategy
• The wrong way of using CCI
• Divergence Trading Mistake

Most of them use the standard settings, CCI set on a 21 period. CCI of 14-period and 50-period are also popular among traders. 

 

CCI Trading Strategy

Our CCI trading strategy involves 3 conditions to be met.

Here’s the first condition: the CCI must reach overbought or oversold conditions twice. Commodity channel index is used by many people in a wrong way. 

 

The wrong way of using CCI

When the CCI technical indicator hits or exceeds values above -100 or 100, many traders interpret this as a signal to enter counter trend positions, in response to overbought and oversold conditions on the market. 

But sometimes the prices can stay a long time in the overbought or oversold areas and during that time they can continue to go higher or lower. That’s why we need the CCI to reach overbought or oversold conditions twice.

Also, we will use values of 200 and -200 for these levels, to eliminate most of the noise. In this NVidia chart, observe the CCI reaching oversold conditions twice, respectively -200 level.

Here’s the same condition met on an exon mobile chart. The CCI reached -200 level once, and another time 2 weeks after. Most people would have taken a long signal the first time the CCI reached oversold conditions, but this is a sure way to lose money on the long run.

It’s better to be conservative and wait for the second move in oversold territory. But this isn’t enough. We need something else to happen on our charts. Here’s our second condition. We need a regular divergence between the CCI and the price. 

A regular divergence is characterized by higher high prices and lower CCI indicator values during an uptrend and lower low prices plus by higher CCI values, during a downtrend. 

 

Divergence Trading Mistake

Most novice traders search for CCI divergences on the charts and automatically interpret this as a valid signal to enter the market.

Just because a CCI divergence appears on a chart, that doesn’t mean that you should automatically enter a reverse position. So, we need the CCI to reach -200 or 200 level, but it also has to form a divergence. 

In this Verizon Communication chart, we spot a regular divergence on the CCI, but we also take into account the first condition, respectively the indicator must reach the -200 level. 

Here’s the same 2 conditions met on an AT&T chart. The CCI reached the -200 level and formed a regular divergence. By now, I’m sure you noticed that i only showed examples with the CCI in oversold conditions and none of the examples were on the overbought side. 

This is because when I’m trading stocks I’m comfortable to trade only long positions, on stocks with good fundamentals (mainly dividend stocks or growth stocks), so I intentionally look only for long signals.

 

Do your best to trade Stocks with good Fundamentals

 

• Consider use a Stock Screener
• Advantages of a Stock Screener
• A clear Trendline breakout

To increase your chances when trading this strategy, it’s good to have fundamentals on your side. 

 

Consider use a Stock Screener

I use a stock screener to keep an eye on the stocks to trade. Stock screeners make a trader’s life a lot simpler than the old days. 

 

Advantages of a Stock Screener

You still have to do your homework, but you can set screens to create your watch list based on your conditions and it’s going to save you a lot of time, especially if you’re monitoring hundreds or thousands of stocks. 

With a stock screener, you have a big advantage. Like i said before, you could take signals when the CCI reaches overbought conditions, like this one on the Netflix chart, but from my experience, the most profitable trades are buy entries on stocks with good fundamentals.

This trade for example, would have brought some profits eventually, but not without a period of consolidation. So, take my advice and look only on the lower side of the CCI and ignore overbought signals. 

 

A clear Trendline breakout

Now, for the third conditions, we want to see a clear trend line break in order to enter the market. We want to see the CCI reaching -200 level, we want a divergence between the CCI and the price, but we also want a trend line break, to confirm the switch in momentum. 

Let’s see all the conditions met on the Netflix stock. First, the CCI reaching oversold condition twice. Then we see the regular divergence. After that, we simply wait for a trend line breakout.

After the price consolidated above the trend line, we can safely enter long on the market. The same pattern on Walt Disney stock. The stock price reached oversold levels twice, the CCI indicator formed a divergence followed by a trend line breakout. 

As you can see, we did experienced some heat, because the price consolidated for a while and retested the previous low, before it finally took off. So, don’t expect a sweet ride all the time, we just have to put out stop orders accordingly and follow our initial plan. 

Here is the IBM stock. Here’s the -200 level hit twice, the divergence and the trend line breakout. Don’t be afraid to enter the market when you see the CCI reaching overbought conditions because this is a classic beginner mistake.

Another great trade on the visa stock. By now, I hope you trained your eyes to spot for this CCI pattern. The oversold level hit twice, the regular divergence and also the trend line break. You might wonder why we have to wait for the breakout to enter the market. 

In this example, if we could have entered way sooner and obtained bigger profits. But you see, this was a fortunate case, many times the market decides to search for lower lows and go for the third time in oversold area. 

By waiting for the trend line breakout, we protect our capital and increase our chances for a true momentum shift. Look at this example, on the Procter & Gamble stock. Here we have our first 2 conditions met, but we didn’t have the trend line breakout, so this was a no go trade.

Here, we have all conditions met and we have a valid breakout. But as you can observe on the chart, the market turned against our position and we lost this trade. 

 

The Stock still had potential

But even if we lost the trade, this stock still had potential for a good trade. Which came few weeks later, when we saw the oversold level once again, the divergence and another trend line break. 

This time, the stock took off and we managed to recoup our losses for the previous trade and recorded some extra profit. 

 

Increase your chances by using a a Stock Screener

Like I said before, if you want to trade stocks and increase your chances when you use this strategy, a stock screener is one of the most important tools in your arsenal. 

It will help you sort through thousands of stocks to find only those that match specific criteria. This way, you get to choose between stocks and trade only the signals that have the greatest potential. 

This strategy is designed for timeframes higher than 4 hours charts and for stock market, but I’ve also recorded good results on forex market also, on lower timeframes. 

 

Final words

Okay, so that’s it I’ve come to the end of this presentation, I hope you’ve enjoyed it and if you really do please write a comment and click the share buttons smash it right, and click to subscribe bell to Allow notifications be updated.

Whenever, I publish content like, this and finally any questions or feedback let me know below and I’ll do my best to help, so with this guide, I hope you got value out of this presentation, I wish you good luck and good trading and I’ll talk to you soon you.

 

About Author