In this trading strategy, we use Donald Lambert’s original article on the Commodity Channel Index (CCI) as a starting point to create a day trading strategy for forex markets.
Formulating our CCI Day Trading Strategy
Many traders use the CCI indicator to find oversold and overbought markets. Buy when it is below -100 and sell when it is above +100.
However, Donald Lambert did the complete opposite.
If the CCI goes above the + 100 line, that’s a signal to establish a long position. When the CCI drops below the + 100 line, the long position is closed out. The same techniques apply to short positions at the -100 line.
Following his words, we will look for long trades when CCI moves above 100 and short trades when it falls below -100.
Regarding its period, he mentioned that:
… data base (look-back period) should be less than one third of the cycle length to produce a reasonable level of theoretical efficiency.
Instead of performing complex cycle analysis, we assume there are daily cycles in forex markets. Hence, the cycle length is 24 hours.
We trade with 30-minute bars. In 24 hours, we have 48 bars. One third of the cycle length is 16 bars.
Hence, the typical setting of 14 period is adequate.
Donald Lambert also cautioned that:
Too short a data base will produce whipsaws as the index interprets daily price fluctuations as being cycle tops or bottoms.
To avoid whipsaws, we will not enter immediately after a signal. We will wait for a retracement and a clear trend bar before entering.
Trading Rules – Day Trading with CCI
Based on the above, we have come up with trading rules for day trading with this indicator.
Long Trading Setup
- 14-period CCI moves above 100
- At least one bar closes down (retracement)
- Enter one tick above bull trend bar
If CCI falls below -100 at any point, the trading setup is void.
Short Trading Setup
- 14-period CCI moves below -100
- At least one bar closes up (retracement)
- Enter one tick below bear trend bar
If CCI rises above 100 at any point, the trading setup is void.
Day Trading with CCI Examples
Winning Trade – Short Day Trade
- CCI fell below -100 line and set the stage for short trades.
- This bar closed up as the first sign of retracement. We went on high alert for a bear trend bar as a signal bar.
- This small bar could have been our trigger but price did not go below it to trigger our sell stop order. Instead, we went short at bearish inside bar (red arrow).
Losing Trade – Long Day Trade
- CCI went above 100.
- Prices retraced down for two bars before giving us a bull trend bar for entry. However, right after we entered the long trade, an outside bar stopped us out by one tick. (As always, we placed our stop-loss a tick below the signal bar.)
- Long trading setups that allow us to enter below the high of the CCI break-out bar tend to work better. The reverse is true for short trades.
This simple trading strategy uses CCI to find momentum before we trade along with it. Waiting for retracement before entering the trade works well to avoid whipsaws.
Add your own trade management rules to trail stops or set price targets, and you can trade with it reliably.
Observing price action after the break-out is the key to finding quality trades.
Source: Donald Lambert’s original article in “Stocks & Commodities V. 1:5 (120-122): Commodity Channel Index: Tool for Trading Cyclic Trends”