Commodity Channel Index (CCI) Indicator – Trading Strategy

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How Traders Use CCI (Commodity Channel Index) to Trade Stock Trends

How Do Traders Use CCI (Commodity Channel Index) to Trade Stock Trends?

The CCI, or Commodity Channel Index, was developed by Donald Lambert, a technical analyst who originally published the indicator in Commodities magazine (now Futures) in 1980. Despite its name, the CCI can be used in any market and is not just for commodities.

CCI is calculated with the following formula:

(Typical Price – Simple Moving Average) / (0.015 x Mean Deviation)

The CCI was originally developed to spot long-term trend changes but has been adapted by traders for use on all markets or timeframes. Trading with multiple timeframes provides more buy or sell signals for active traders. Traders often use the CCI on the longer-term chart to establish the dominant trend and on the shorter-term chart to isolate pullbacks and generate trade signals.

Key Takeaways

  • The CCI is a market indicator used to track market movements that may indicate buying or selling.
  • The CCI compares current price to average price over a specific time period.
  • Different strategies can use the CCI in different ways, including using it across multiple timeframes to establish dominant trends, pullbacks, or entry points into that trend.
  • Some trading strategies based on CCI can produce multiple false signals or losing trades when conditions turn choppy.

The strategies and indicators are not without pitfalls, and adjusting strategy criteria and the indicator period may provide better performance. Although all systems are susceptible to losing trades, implementing a stop-loss strategy can help cap risk, and testing the CCI strategy for profitability on your market and timeframe is a worthy first step before initiating trades.

Understanding How Traders Use CCI (Commodity Channel Index) to Trade Stock Trends

CCI Indicator

The CCI compares the current price to an average price over a period of time. The indicator fluctuates above or below zero, moving into positive or negative territory. While most values, approximately 75%, fall between -100 and +100, about 25% of the values fall outside this range, indicating a lot of weakness or strength in the price movement.

Figure 1. Stock Chart with CCI Indicator

The chart above uses 30 periods 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 periods are also common.

A period refers to the number of price bars the indicator will include in its calculation. The price bars can be one-minute, five-minute, daily, weekly, monthly, or any timeframe you have accessible on your charts.

The longer the period chosen (the more bars in the calculation), the less often the indicator will move outside -100 or +100. Short-term traders prefer a shorter period (fewer price bars in the calculation) since it provides more signals, while longer-term traders and investors prefer a longer period such as 30 or 40. Using a daily or weekly chart is recommended for long-term traders, while short-term traders can apply the indicator to an hourly chart or even a one-minute chart.

Indicator calculations are performed automatically by charting software or a trading platform; you’re only required to input the number of periods you wish to use and choose a timeframe for your chart (i.e., 4-hour, daily, weekly). Stockcharts.com, Freestockcharts.com, and trading platforms such as Thinkorswim and MetaTrader all provide the CCI indicator.

When the CCI is above +100, this means the price is well above the average price as measured by the indicator. When the indicator is below -100, the price is well below the average price.

CCI Basic Strategy

A basic CCI strategy is used to track the CCI for movement above +100, which generates buy signals, and movements below -100, which generates sell or short trade signals. Investors may only want to take the buy signals, exit when the sell signals occur, and then re-invest when the buy signal occurs again.

Figure 2. ETF Chart with CCI Basic Trade Signals

The weekly chart above generated a sell signal in 2020 when the CCI dipped below -100. This would have told longer-term traders that a potential downtrend was underway. More active traders could have also used this as a short-sale signal. This chart demonstrates how in early 2020 a buy signal was triggered, and the long position stays open until the CCI moves below -100.

Multiple Timeframe CCI Strategy

The CCI can also be used on multiple timeframes. A long-term chart is used to establish the dominant trend, while a short-term chart establishing pullbacks and entry points into that trend. More active traders commonly use a multiple timeframe strategy, and one can even be used for day trading, as the “long term” and “short term” is relative to how long a trader wants their positions to last.

When the CCI moves above +100 on your longer-term chart, this indicates an upward trend, and you only watch for buy signals on the shorter-term chart. The trend is considered up until the longer-term CCI dips below -100.

Figure 2 shows a weekly uptrend since early 2020. If this is your longer-term chart, you will only take buy signals on the shorter-term chart.

When using a daily chart as the shorter timeframe, traders often buy when the CCI dips below -100 and then rallies back above -100. It would then be prudent to exit the trade once the CCI moves above +100 and then drops back below +100. Alternatively, if the trend on the longer-term CCI turns down, that indicates a sell signal to exit all long positions.

Figure 3. Buy Signals and Exits in Longer-term Uptrend

Figure 3 shows three buy signals on the daily chart and two sell signals. No short trades are initiated, since the CCI on the long-term chart shows an uptrend.

When the CCI is below -100 on the longer-term chart, only take short sale signals on the shorter-term chart. The downtrend is in effect until the longer-term CCI rallies above +100. The chart indicates that you should take a short trade when the CCI rallies above +100 and then drops back below +100 on the shorter-term chart. Traders would then exit the short trade once the CCI moves below -100 and then rallies back above -100. Alternatively, if the trend on the longer-term CCI turns up, exit all short positions.

Alterations and Pitfalls of CCI Strategies

You can use CCI to adjust the strategy rules to make the strategy more stringent or lenient. For example, when using multiple timeframes, make the strategy more stringent by only taking long positions on the shorter timeframe when the longer-term CCI is above +100. This reduces the number of signals but ensures the overall trend is strong.

Entry and exit rules on the shorter timeframe can also be adjusted. For example, if the longer-term trend is up, you may allow the CCI on the shorter-term chart to dip below -100 and then rally back above zero (instead of -100) before buying. This will likely result in a paying a higher price but offers more assurance that the short-term pullback is over and the longer-term trend is resuming.

With the exit, you may want to allow the price to rally above +100 and then dip below zero ​(instead of +100) before closing the long position. While this could mean holding through some small pullbacks, it may increase profits during a very strong trend.

The figures above use a weekly long-term and daily short-term chart. Other combinations can be used to suit your needs, such as a daily and hourly chart or a 15-minute and one-minute chart. If you’re getting too many or too few trade signals, adjust the period of the CCI to see if this corrects the issue.

Unfortunately, the strategy is likely to produce multiple false signals or losing trades when conditions turn choppy. It is quite possible that the CCI may fluctuate across a signal level, resulting in losses or unclear short-term direction. In such cases, trust the first signal as long as the longer-term chart confirms your entry direction.

The strategy does not include a stop-loss, although it is recommended to have a built-in cap on risk to a certain extent. When buying, a stop-loss can be placed below the recent swing low; when shorting, a stop-loss can be placed above the recent swing high.

Commodity Channel Index (CCI)

Indicators and Strategies

Commodity Channel Index (CCI)

The Commodity Channel Index (CCI) is a momentum oscillator used in technical analysis that measures an instrument’s variations from its statistical mean. The CCI is a very well-known and widely-used indicator that has gained a level of popularity in no small part due to its versatility. It is a fully unbounded oscillator and has no lower or upper limit. The CCI is often used to find reversals as well as divergences. Originally, the indicator was designed to be used for identifying trends in commodities, however, it is now used on a wide range of financial instruments.

Read more about the Commodity Channel Index.

Hello Traders! After publishing Trend Lines for RSI yesterday, I realized that Trend Lines for more indicators needed by the traders. so I decided to make it for four different indicators: RSI, CCI, OBV, Momentum In the indicator options you can choose the indicator from pull-down menu. How it works? – On each bar it finds last 10 higher and lower Pivot.

CCI Indicator Trading Strategies

Last updated on February 20th, 2020

The CCI indicator, the commodity channel index, is a momentum based indicator that falls under the oscillator classification. The CCI oscillates between several levels including:

These levels are often used as overbought and oversold levels. The +100 would be considered overbought as an example. A move below 100 would be used as an oversold condition.

From there, traders expect a retrace in price and often look for reversal trades.

Donald Lambert, the designed of the indicator, actually used extreme readings such as +100 or -100 as signs of a strong/weak market. He would then look to establish a trading position in that direction.

While oversold and overbought levels were not the intention of the CCI, many traders in Forex use those market states as the basis for a trading strategy.

CCI Indicator Settings

Like many trading indicators, the CCI has certain variables that can be changed depending on the trading strategy:

  • Look-back Period: Usually 14 and 20, this is the number of periods prior to current that the indicator will use in the calculation. 50 can also be used.
  • Levels: These are the +100, -200, 0, levels that can be changed depending on the back testing results of the trader
  • Price Source: While many indicators use the closing price, the CCI will use the average price of 3 prices: [(High + Low + Close)/3] as part of the calculation

From there, the calculation of the CCI (is using a 14 period setting) will be:

CCI = (Typical Price – 14 Period SMA of Typical price) / (.015 x Mean Deviation)

Typical Price = (High + Low + Close)/3

The calculation that includes the .015, is designed to ensure that the majority of the time, the levels of +100 and -100 contain price.

Using CCI For Momentum

The indicator can be considered a detrended moving average oscillator. To explain what that means may and give you a possible “AHA” moment, let’s look at a chart.

I have plotted a 20 period simple moving average on price and the CCI 20 in the lower pane. A few things you should notice to understand how the CCI works:

  • The green arrows show where the CCI is crossing the zero line. Look at price crossing or hovering near the zero line
  • The green arrow are extreme price moves. Notice how far and fast price pulls away from the SMA and the CCI reading

What you may want to consider is the CCI is measuring how fast/far price moves away from an average price.

The further price moves away, the faster price moves away, this is how momentum is measured.

  • Price that is hugging a moving average is not showing momentum
  • Price pulling from an average price is showing momentum
  • CCI measures, via the levels, the strength of the momentum in the market

In essence, we are looking at the CCI as a means to gauge to see where price is in relation to a moving average. From there, we can determine if a market has momentum and is worthy to trade.

50 CCI + 34 EMA Trading Strategy – Trend Direction Change

The first CCI trading strategy is trading a trend direction change using:

  • CCI 50 – paying attention to the zero level
  • CCI 14 – paying attention the the +100 and -100 levels
  • 34 EMA

This is a 15 minute chart of crude oil futures which is a preferred day trading market here at Netpicks.

Trading Rules

  1. Long trades: Price must cross and close above the 34 EMA and the 50 must cross the zero line
  2. Check the 14 to ensure it is above the zero line. You could enter at close or break of highs
  3. Short trades: Price must cross and close below the 34 EMA and the 50 CCI must have crossed below zero
  4. CCI 14 must already be on the downside of the zero line

Stops and Targets

There are many ways to place a stop loss and some traders may choose to place their stop a few ticks/pips/points below the candlestick that sets up the trade entry.

Profit targets can be a multiple of your risk or you may choose to trail and scale out at certain chart points.

Traders may also decide to exit when the indicator turns down (up) from the 100 levels. If you find price moving with momentum and the CCI not looking back after crossing the 100 levels, this may be a great trailing stop opportunity.

Trading The Trend Change Pullback Strategy

This is a more conservative approach which would require some type of pullback in price or the CCI. The reason is that trend changes can be messy or fail and this method will use a standard market mechanic – pullbacks in price.

This is a four hour chart of a Forex pair and will show both long and short trades.

I will also show the original trade using the trend change method and the pullback trading strategy.

Explanation and Pullback Rules

  1. This is our standard trend change strategy and while we did get a push to the upside, price reversed and the 50 CCI dropped below the zero line
  2. This is another trend change trade and although the zero line is not on the 14 CCI, it has crossed. This trade does sit through 16 hours of chop.
  3. Here is the first pullback trade and can be used as an add-on or a standalone entry. The 50 CCI has bounced off the +100 level (or the zero level is fine) and price has stalled near the 34 EMA. Your trade entry can be when the 14 CCI crosses back over the zero line which is this example
  4. This is the standard trend change entry
  5. CCI 50 is bouncing off the -100 line zone, the 14 CCI is bouncing off the zero line, price is bouncing off the 34 EMA
  6. CCI 50 stays below zero line, the 14 CCI crosses up and over the +75 line, you can enter when the 14 CCI crosses back under the zero line

What we are looking for in a pullback trade are a few things:

  • We need to see 50 CCI stay on the same side of the zero line. If it crosses, we revert back to the original trend change rules.
  • The 50 can bounce off the +100 line or the zero line once price direction is established (long trade, reverse for shorts)
  • The 14 can bounce over the zero line to the opposite 75 level (+or -) and crossing back over zero is the trigger
  • If the 50 stays above +100 for a long trade, the 14 CCI crossing under the +100 line and back again is a trigger

The stops and profit targets will be the same for these trades as well.

All we are doing is allowing the trend to change, evolve, and trading the first pullback in the trend.

If a trend is not going to establish, the first place it will fail is in the first pullback where price fails to make new highs or lows.

Keep in mind while we can use the CCI for trade triggers, many traders who understand price action will use the signs the market is giving.

Using Price Action With CCI Pullbacks

Using price action along with CCI can form the basis of a profitable trading strategy.

With price action, we are looking to get into a position earlier than a lagging indicator like the CCI will get us in which can allow us to be in positions before momentum picks up.

This is the same chart as the last example and I have focused in on two areas.

On the left, we can see upside momentum stalling as we pull back into the EMA. The noted candle is an inside candlestick which means volatility compression. If you were to drop to a lower time frame, you would see a range forming.

Traders can position inside the range or set an order to short if/when price breaks out the bottom of the range. In doing so, in this example, you participate fully in the momentum push down.

On the second example, we can see the range forming.

  • Price fails to break out of the short term range
  • Price wipes out the previous 7 days of price action
  • Inside bar is volatility compression where you’d see a range on the lower time frame. Since we are bearish, we’d set a sell stop order at the bottom of the range
  • As with any trading strategy, I prefer using price action alongside an indicator for any trading decisions. There are plenty of trading articles on this blog that covers many types of price action trading skills.

    You can also use various forms of technical analysis including trend line breaks on the bull flags and bear flags that form in the pullbacks for your trade entry.

    CCI Trading Strategy – Continuation Trades

    While the word continuation could apply to the trend change pullback strategy, we should focus on the intention behind the trade.

    In this continuation strategy, we look to take advantage of a trend that is maturing and position in that trend.

    • We want the instrument to have changed trend and gone through the first pullback
    • The 50 CCI must stay on the right side of the zero line
    • 14 period CCI must dip below -75 for long trades
    • Enter when CCI crosses zero line

    This is a stock chart of NKE and is the 15 minute chart for day trading.

    On this chart, we’ve had the trend change as well as the first pullback after the change.

    1. 14 CCI has dipped below the -75 line and upon crossing over the zero line, you enter long.
    2. Once the CCI drops back under the zero line, we can exit. This chart has $1.46 a share profit.
    3. The 50 CCI is still on the long side and the 14 CCI crosses back over the zero line. Trade entry.
    4. The 14 period CCI drops below zero where we exit for a $1.45/share profit

    Interesting to note that the CCI crossing zero would have you exiting prior to the gap down in price.

    In Conclusion

    These Commodity Channel Index trading strategies are worth your time to back test and show yourself the potential of using the CCI indicator

    Experiment with different stop loss locations as well as ways to maximize the profit on each trade.

    Trading multiple contracts can aid you in scaling partial positions while leaving enough on the table if/when price begins to run.

    As with all trading strategies, ensure you make a trading plan and be consistent in following it. You will win. You will lose. Accept the losses and keep executing the trading plan.

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