The CCI is a popular tool for technical analysis but is often overlooked by other momentum indicators such as the RSI and MACD. However, it can be equally as effective when you know how to use it correctly. The CCI can display important trading signals at an earlier stage due to its higher sensitivity to price changes. Whilst there are plenty of CCI strategies, they don’t all include a pair of CCI indicators which can help to give you that extra edge in your trading.
What is the CCI indicator?
The Commodity Channel Index (CCI) indicator measures the current price level relative to an average price level over a given period of time. It is one of the most basic technical indicators that you can trade with and included with most trading platforms.
The CCI is relatively high when prices are far above their average. On the contrary, the CCI is relatively low when prices are far below their average. Using this method, forex traders can use the CCI to try and identify overbought and oversold levels.
A CCI reading above 100 is considered overbought and suggests that the bulls may be running out of energy. A CCI reading below -100 is considered oversold and suggests that the bears are no longer hunger and might start to make way for the bulls to return.
The CCI helps you identify peaks or troughs in a currency pairs price and can indicate the weakening or end of a trend and a change in direction. This means that you can, in theory, enter a reversal trade right as a trend is beginning, or exit an existing trade before it starts to move against you.
What is the double CCI strategy?
If the name didn’t give it away, the only difference between a standard CCI strategy and the double CCI strategy is that the latter is using 2 CCI indicators. This means that you get an additional filter to help confirm buy and sell signals, which can help to filter out some bad trades.
I think 2 technical indicators are better than one, especially when they are used for different purposes. You could use one of the CCI’s to look for extreme conditions with a short-term period, and the other to look for extreme conditions with a long-term period. If the dual CCI indicators were to both agree, this could suggest a strong signal.
If 2 CCI’s is better than 1, what is even better is confirming the trade with additional technical analysis. Even with 10 CCI’s, you can still get false signals. Therefore, you might want to use a trend trading indicator such as Bollinger bands to ensure that you only take positions that are in line with the overall trend.
You can also keep an eye on support/resistance and price action with candlestick patterns to look for price to react around key levels. The more analysis that you perform, the greater the reliability of your trading strategy signals can be.
Double CCI strategy buy signal
- CCI crosses below the -100 level
- CCI crosses back above the -100 level (optional)
- Entry confirmed with additional indicators and price action (optional)
- Enter a buy position
The EUR/USD 1-hour chart below shows the double CCI strategy using a 14-period CCI and 21-period CCI. You can see the CCI going below the oversold -100 level on both. The trade is confirmed by price breaking below the Bollinger bands, CCI divergence and the double CCI indicators moving back above the extreme level.
If we would have taken the trade without these extra confirmations, it would have been hard to recover this trade without a wide stop loss. I have marked the most recent level of support (not visible on chart) for the stop loss level whereas the opposite double CCI signals could have been an exit point.
Double CCI strategy sell signal
- CCI crosses above the 100 level
- CCI crosses back below the 100 level (optional)
- Entry confirmed with additional indicators and price action (optional)
- Enter a sell position
The EUR/USD 1-hour chart below shows the double CCI strategy using a 14-period CCI and 21-period CCI. You can see the CCI going above the overbought 100 level on both. The trade is confirmed by price breaking above the Bollinger bands, CCI divergence and the double CCI indicators falling back below the extreme level.
If we would have taken the trade without these extra confirmations, the price would not have been as good. We could also use the resistance and upper band level as an area to place the stop loss whereas the lower band and opposite double CCI signals could have been the exit point.
Does the double CCI strategy work?
Yes, it can work when used correctly and combined with other types of market analysis. I wouldn’t personally trade forex using the dual CCI system without using other trading indicators to confirm the signals. One of the best ways to confirm double CCI signals is to look for divergence.
If the price on the chart makes consecutive highs, and the indicator shows consecutive lows, this is called CCI Divergence. Likewise, if the price on the chart makes consecutive lows, and on the CCI indicator, we see consecutive highs, this is also a CCI Divergence.
You should also keep in mind that some forex traders use the CCI extreme levels to trade breakouts, which is the opposite to the CCI reversal strategy. It is quite common the CCI will continue to increase or decrease way past the extreme levels before price turns around.
Therefore, your money management strategy is going to be very important. I have seen traders use the same trading strategy produce completely different results simply because of the stop loss and take profit levels they are using. This is especially common with beginners who use a wide stop loss and over leverage their forex account.
I would want to exit bad trades early and let my winning trades run. I may even lock in a good trade at break even point and trail the remainder of the position with a trailing stop. With a favourable risk to reward ratio, you do not even need a high win rate. If your winning trades are 3 times greater than your losing trades, you could have a win rate less than 50% and still come out on top.
Advantages of trading with the double CCI strategy
- Can help spot market reversals
- Can get you into new trends early
- Provides extra confirmation on trades
- Easy to understand trading signals
Disadvantages of trading with the double CCI strategy
- Doesn’t work great on its own
- Needs confirmation from other indicators
- Extreme levels can be interpreted differently
What are the best double CCI strategy settings?
This really depends on your trading style. If you are an aggressive trader and want as many buy/sell signals as possible, you could use a short CCI period of 7 on one of the CCI indicators and the default of 14 on the other. If you are more conservative, you could use the 14-period default and a 21-period CCI to confirm the signals over more data.
Keep in mind that you will probably get lots of false signals the lower you set the CCI period as it will be more susceptible to price movements. I would personally stick to the 14-period CCI and above to make sure there is enough price action taken into account.
What are the best timeframes for the double CCI strategy?
Again, it depends on your circumstances. If you only have a few minutes to trade each day, then you will probably want to look at the daily charts for dual CCI signals. If you are trading full time, then you can compliment your existing trading strategy with a couple of CCI’s on any timeframe from the 1-minute charts and up.
I find that the lower chart timeframes can have a lot of noise which generates many false reversal signals on the CCI. You will often see the CCI go above or below an extreme level but not return for a while. Some traders might even wait until there is a cross of the CCI above or below the extreme before taking a position.
Conclusion: is the double CCI strategy worth using?
Yes! I feel that any technical analysis which can help to identify entry and exit points in the market can be beneficial. Using double CCI indicators on your charts can show you when a currency pair may be overbought or oversold which presents on opportunity for trading the reversal.
However, I would not use it on its own without confirmation from other chart analysis. Otherwise there will be too many false signals. You will also need to have a good money management plan in place and make sure your trading emotions are in check.
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