Hello guys, in this video i will reveal aneffective trading strategy involving the commodity channel index, strategy which i mainly usedwhen I’m trading stocks.
The CCI is an oscillator used in technicalanalysis in order to measure the variation of a stock’s price from its statisticalmean.
High values indicate that prices are unusuallyhigh compared to average prices.
Low values of the CCI indicate that pricesare unusually low.
CCI is one of the most popular indicatorsand traders always tweak the settings of the indicator, depending on their favorite timeframe or trading style.
Most of them use the standard settings, CCIset on a 21 period.
CCI of 14-period and 50-period are also popularamong traders.
Our CCI trading strategy involves 3 conditionsto be met.
Here’s the first condition: the CCI mustreach overbought or oversold conditions twice.
Commodity channel index is used by many peoplein a wrong way.
When the CCI technical indicator hits or exceedsvalues above -100 or 100, many traders interpret this as a signal to enter counter trend positions, in response to overbought and oversold conditions on the market.
But sometimes the prices can stay a long timein the overbought or oversold areas and during that time they can continue to go higher orlower.
That’s why we need the CCI to reach overboughtor oversold conditions twice.
Also, we will use values of 200 and -200 forthese levels, to eliminate most of the noise.
In this NVidia chart, observe the CCI reachingoversold conditions twice, respectively -200 level.
Here’s the same condition met on an exonmobile chart.
The CCI reached -200 level once, and anothertime 2 weeks after.
Most people would have taken a long signalthe first time the CCI reached oversold conditions, but this is a sure way to lose money on thelong run.
It’s better to be conservative and waitfor the second move in oversold territory.
But this isn’t enough.
We need something else to happen on our charts.
Here’s our second condition.
We need a regular divergence between the CCIand the price.
A regular divergence is characterized by higherhigh prices and lower CCI indicator values during an uptrend and lower low prices plusby higher CCI values, during a downtrend.
Most novice traders search for CCI divergenceson the charts and automatically interpret this as a valid signal to enter the market.
Just because a CCI divergence appears on achart, that doesn’t mean that you should automatically enter a reverse position.
So, we need the CCI to reach -200 or 200 level, but it also has to form a divergence.
In this Verizon Communication chart, we spota regular divergence on the CCI, but we also take into account the first condition, respectivelythe indicator must reach the -200 level.
Here’s the same 2 conditions met on an AT&Tchart.
The CCI reached the -200 level and formeda regular divergence.
By now, I’m sure you noticed that i onlyshowed examples with the CCI in oversold conditions and none of the examples were on the overboughtside.
This is because when I’m trading stocksI’m comfortable to trade only long positions, on stocks with good fundamentals (mainly dividendstocks or growth stocks), so i intentionally look only for long signals.
To increase your chances when trading thisstrategy, it’s good to have fundamentals on your side.
I use a stock screener to keep an eye on thestocks to trade.
Stock screeners make a trader’s life a lotsimpler than the old days.
You still have to do your homework, but youcan set screens to create your watch list based on your conditions and it’s goingto save you a lot of time, especially if you’re monitoring hundreds or thousands of stocks.
With a stock screener, you have a big advantage.
I’ve put several stock screeners in thedescription, if you want both technical and fundamental indicators on your side with thisstrategy, check them out.
Like i said before, you could take signalswhen the CCI reaches overbought conditions, like this one on the Netflix chart, but frommy experience, the most profitable trades are buy entries on stocks with good fundamentals.
This trade for example, would have broughtsome profits eventually, but not without a period of consolidation.
So, take my advice and look only on the lowerside of the CCI and ignore overbought signals.
Now, for the third conditions, we want tosee a clear trend line break in order to enter the market.
We want to see the CCI reaching -200 level, we want a divergence between the CCI and the price, but we also want a trend line break, to confirm the switch in momentum.
Let’s see all the conditions met on theNetflix stock.
First, the CCI reaching oversold conditiontwice.
Then we see the regular divergence.
After that, we simply wait for a trend linebreakout.
After the price consolidated above the trendline, we can safely enter long on the market.
The same pattern on Walt Disney stock.
The stock price reached oversold levels twice, the CCI indicator formed a divergence followed by a trend line breakout.
As you can see, we did experienced some heat, because the price consolidated for a while and retested the previous low, before it finallytook off.
So, don’t expect a sweet ride all the time, we just have to put out stop orders accordingly and follow our initial plan.
Here is the IBM stock.
Here’s the -200 level hit twice, the divergenceand the trend line breakout.
Don’t be afraid to enter the market whenyou see the CCI reaching overbought conditions because this is a classic beginner mistake.
Another great trade on the visa stock.
By now, i hope you trained your eyes to spotfor this CCI pattern.
The oversold level hit twice, the regulardivergence and also the trend line break.
You might wonder why we have to wait for thebreakout to enter the market.
In this example, if we could have enteredway sooner and obtained bigger profits.
But you see, this was a fortunate case, manytimes the market decides to search for lower lows and go for the third time in oversoldarea.
By waiting for the trend line breakout, weprotect our capital and increase our chances for a true momentum shift.
Look at this example, on the Procter&Gamblestock.
Here we have our first 2 conditions met, butwe didn’t have the trend line breakout, so this was a no go trade.
Here, we have all conditions met and we havea valid breakout.
But as you can observe on the chart, the marketturned against our position and we lost this trade.
But even if we lost the trade, this stockstill had potential for a good trade.
Which came few weeks later, when we saw theoversold level once again, the divergence and another trend line break.
This time, the stock took off and we managedto recoup our losses for the previous trade and recorded some extra profit.
Like i said before, if you want to trade stocksand increase your chances when you use this strategy, a stock screener is one of the mostimportant tools in your arsenal.
It will help you sort through thousands ofstocks to find only those that match specific criteria.
This way, you get to choose between stocksand trade only the signals that have the greatest potential.
This strategy is designed for timeframes higherthan 4 hours charts and for stock market, but I’ve also recorded good results on forexmarket also, on lower timeframes.
If you got any value from this, please considersubscribing to our channel, share and like this video, as it would help us a lot in thefuture.
Until next time.
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