How do traders use CCI (Commodity Channel Index) to trade stock trends?
The CCI or Commodity Channel Index was developed by technical analyst Donald Lambert, who originally commodity Magazine (now futures) In 1980. Despite the name, CCI can be used in any market, not just commodities.
CCI was originally developed to detect long-term trend changes, but has been adjusted by traders for use in all markets or time frames. Multi-time frame trading provides more buy or sell signals for active traders. Traders usually use CCI on long-term charts to establish dominant trends, and use CCI on short-term charts to isolate callbacks and generate trading signals.
Strategies and indicators are not without traps. Adjusting strategy standards and indicator cycles may provide better performance. Although all systems are prone to losing trades, implementing stop-loss strategies can help limit risk. Testing the profitability of CCI strategies in your market and time frame is a worthy first step before you start trading.
- CCI is a market indicator used to track market trends that may indicate buying or selling.
- CCI compares the current price with the average price in a specific time period.
- Different strategies can use CCI in different ways, including using it in multiple time frames to establish dominant trends, pullbacks, or entry points into the trend.
- Some CCI-based trading strategies may generate multiple false signals or lose trades when conditions become unstable.
The calculation formula of CCI is as follows:
(Typical price-simple moving average)/(0.015 x average deviation)
Understand the commodity channel index
CCI compares the current price with the average price over a period of time. The indicator fluctuates above or below zero and enters the positive or negative zone. Although most values (about 75%) are between -100 and +100, about 25% of the values are outside this range, indicating that there are many weaknesses or strengths in price movements.
The above figure uses 30 cycles in the CCI calculation; since the chart is a monthly chart, each new calculation is based on the most recent 30 months. CCIs of 20 and 40 cycles are also common.
One period Refers to the number of price bars that the indicator will include in its calculation. The price bar can be one minute, five minutes, daily, weekly, monthly, or any time frame you can access on the chart.
The longer the selected period (the more bars in the calculation), the lower the frequency of the indicator moving beyond -100 or +100. Short-term traders prefer shorter periods (fewer price bars in the calculation) because it provides more signals, while long-term traders and investors prefer longer periods, such as 30 or 40. It is recommended to use daily or weekly charts for long-term trading. Term traders, while short-term traders can apply indicators to hourly charts or even one-minute charts.
special attention items
Indicator calculations are performed automatically by chart software or trading platforms; you only need to enter the number of cycles you want to use and select a time range for your chart (ie 4 hours, daily, weekly). Stockcharts.com, Freestockcharts.com, And trading platforms, such as Thinker swimming and Metatrader Both provide CCI indicators.
When the CCI is higher than +100, it means that the price is much higher than the average price measured by the indicator. When the indicator is below -100, the price is much lower than the average price.
CCI trading strategy basis
The basic CCI strategy is used to track the movement of the CCI above +100 to generate a buy signal, and the movement below -100 generates a sell or short trade signal.Investors may just want to accept a buy signal, exit when a sell signal appears, and then reinvest when a buy signal appears again.
The above weekly chart generated a sell signal when the CCI fell below -100 in 2011. This will tell long-term traders that a potential downtrend is underway. More active traders can also use this as a short selling signal. This chart shows how the buy signal was triggered at the beginning of 2012, and the long position remained open until the CCI fell below -100.
Multi-time frame CCI strategy
CCI can also be used for multiple time frames. Long-term charts are used to determine the dominant trend, while short-term charts are used to determine the pullback and entry points of the trend. More active traders usually use multiple time frame strategies and can even be used for day trading, because “long-term” and “short-term” are related to how long a trader wants to hold a position.
When the CCI moves above +100 on your long-term chart, it indicates an uptrend and you only observe the buy signal on the short-term chart. Before the long-term CCI fell below -100, this trend was considered upward.
The above chart shows the weekly upward trend since the beginning of 2012.If this is your long-term chart, you will only get buy signals on the short-term chart.
When using the daily chart as a shorter time frame, traders usually buy when the CCI drops below -100, and then rises back to above -100. Once the CCI rises above +100 and then falls below +100, exit the transaction with caution. Or, if the long-term CCI trend declines, it indicates that a sell signal exits all long positions.
The above chart shows three buy signals and two sell signals on the daily chart. No short trade was initiated because the CCI on the long-term chart shows an upward trend.
When the CCI is below -100 on the long-term chart, only a short-sell signal is taken on the short-term chart. The downward trend remains effective until the long-term CCI rebounds above +100. This chart shows that when CCI rebounds above +100 on the short-term chart and then falls below +100, you should trade short. Once the CCI is below -100 and then rebounds to above -100, the trader will exit the short trade. Or, if the long-term CCI trend rises, exit all short positions.
CCI strategy changes and pitfalls
You can use CCI to adjust the policy rules to make the policy stricter or looser. For example, when using multiple time frames, when the long-term CCI is higher than +100, only establish long positions in a shorter time frame, making the strategy more stringent. This reduces the number of signals, but ensures that the overall trend is strong.
It is also possible to adjust the entry and exit rules within a shorter time frame. For example, if the long-term trend is upward, you can let the CCI on the short-term chart fall below -100, and then return to above zero (instead of -100) Before buying. This may result in higher prices being paid, but provides more assurance that the short-term pullback has ended and the long-term trend is recovering.
When exiting, you may want to let the price rebound above +100 and then fall below zero (instead of +100) before closing the long position. Although this may mean sticking to some small corrections, it may increase profits in a very strong trend.
The above figures use weekly long-term and daily short-term charts. You can use other combinations to meet your needs, such as daily and hourly charts or 15-minute and 1-minute charts. If you receive too many or too few trading signals, please adjust the CCI cycle to see if this solves the problem.
Unfortunately, when conditions become unstable, this strategy may generate multiple false signals or losing trades. CCI is likely to fluctuate in signal levels, leading to losses or short-term direction uncertainty. In this case, as long as the long-term chart confirms your entry direction, believe the first signal.
The strategy does not include stop loss, but it is recommended to set a built-in risk limit to a certain extent. When buying, you can set a stop loss below the recent swing low; when you are short, you can set a stop loss above the recent swing high.