How do traders use the CCI (Commodity Channel Index) to trade stock trends?
The CCI, or Commodity Channel Index, was developed by Donald Lambert, a technical analyst who published this indicator in 1980 in Commodities (Current Futures) magazine in 1980. Despite its name, the CCI can be used in any market and only Not for goods.
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CCI was originally developed to observe long-term trend changes but has been adapted by traders to use in all markets or time frames. Trading multiple timeframes provides active traders with additional buy or sell signals. Traders often use the CCI on a long-term chart to establish dominant trends and on a short-term chart to isolate pullbacks and create trade signals.
Strategies and indicators are not without problems. And adjusting strategy metrics and index period may provide better performance. Although all systems are susceptible to losing trades, implementing a stop-loss strategy can help reduce risk. And testing the CCI strategy for profitability in your market and time frame is a worthy first step before starting trading. Our offer to you: Global Market Intelligence Course (Forex)
Important Notes
CCI is a market indicator used to track market movements and may indicate buying or selling.
The CCI compares the current price with the average price over a specific time period.
Different strategies can use CCI in different ways. including using it on multiple timeframes to create dominant trends, pullbacks, or entry points into that trend.
Some trading strategies based on CCI can generate multiple false signals or losing trades in the wrong conditions.
Calculate the CCI
CCI is calculated by the following formula:
(Typical price – simple moving average) / (0.015 Mean deviation of the average)
Familiarity with CCI Commodity Channel Index
CCI compares the current price with the average price over a period of time. This index is variable above or below zero. and moves to positive or negative territory. While the majority of values lie roughly between -100 and +100, about 25% of the values fall outside this range, indicating great weakness or strength in the price movement.
Special considerations
Basics of CCI Trading Strategy
The weekly chart above generated a sell signal in 2011 when the CCI broke below -100. This told long-term traders that a possible bearish trend was underway. More active traders can also use this as a short sell signal. This chart shows how a buy signal was created in early 2012 and the long position remains open until the CCI falls below minus 100.5.
CCI multi-time frame strategy
CCI can also be used in multiple timeframes. A long-term chart is used to determine the dominant trend. While a short-term chart identifies strengths and entry points to that trend. More active traders usually use a multiple time frame strategy. And they can even be used for day trading. Because “long” and “short” are relative to how long a trader wants their positions to last.
When the CCI reaches above 100+ on your long-term chart, it indicates a bullish trend and you are only looking for buy signals in the short-term. This trend is considered until the long-term CCI falls below -100.
The above figure shows the weekly uptrend since early 2012.
When using the daily chart as a shorter time frame, traders often buy when the CCI drops below -100 and then rises above 100. After the CCI rises above +100 and then drops below +100, it is reasonable to exit the trade. Alternatively, if the long-term CCI trend is down, this indicates a sell signal to exit all long positions.
Explanation of the above figure
The figure above shows three buy signals on the daily chart and two sell signals. No short trades are initiated as the CCI is showing an uptrend on the long-term chart.
When the CCI is below -100 on the long-term chart, only take short sell signals on the short-term chart. The downtrend will continue until the long-term CCI reaches above +100. The chart shows that when the CCI is above +100, you should take a short trade and then go back below +100 on the short-term chart. Traders exit short-term trades after the CCI drops below -100 and then rises above 100. Alternatively, exit all short positions if the long-term CCI trend rises.
Variations and problems of CCI strategies
You can use CCI to set strategy rules. To make the strategy more accurate and softer. For example, make the strategy stricter when using multiple time frames. Only by taking long positions in the shorter time frame when the long term CCI is above +100. This reduces the number of signals but ensures that the overall trend is strong.
Example
Entry and exit rules can also be set in a shorter period of time. For example, if the long-term trend is up, you might let the CCI fall below -100 on the short-term chart and then rise above zero (instead of -100) before buying. This will likely result in a higher payout, but will provide more assurance that the short-term pullback is over and the long-term trend is resuming.
By exiting, you may want to let the price rise above +100 and then drop below zero (instead of +100) before closing the long position. While this could mean holding on to some small pullbacks, it may extend profits in a very strong trend.
In the figures above, long-term weekly and short-term daily charts are used. Other combinations can be used for your needs, such as a daily and hourly chart or a 15-minute and one-minute chart. If you are getting too many or too few trade signals, adjust the CCI period to see if that fixes the problem.
Unfortunately, this strategy is likely to generate several false signals or lose trades when the going gets tough. It is quite possible that the CCI will fluctuate at the signal level, leading to a loss or an uncertain short-term direction. In such cases, trust the first signal until the long-term chart confirms your entry direction. Our suggestion to you: Cryptocurrency
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