How The Pro's Trade Using Commodity Channel Index - CCI Technical Analysis


Uploaded by StockMarketStrategy on 04.05.2010

Transcript:
Hi Traders. Philip Thygesen here from Stock-Market-Strategy. Before I start I just want to say that trading
involves risk and hard work. So please do your own due diligence before trading for
real money. Today I am going to talk about Commodity Channel Index also known as CCI.
I will explain the theory behind CCI and then show you some charts so you can see how CCI
works. Finally I will give some tips about how to best use CCI in conjunction with other
indicators and/or chart analysis. If you go to our website www.stock-market-strategy.com
you will find a tab called education, technical analysis and Commodity Channel Index CCI.
Here you will find a written summary including two charts showing you how to trade using
CCI. Background Information About Commodity Channel Index CCI The Commodity Channel Index
CCI was created by Donald Lambert and was originally used to identify cycles in commodities.
But it works as well in the stock market or the forex market for that matter. The reason
for creating this indicator was that Lambert as well as many other traders believe that
every commodity or stock moves in cycles where the high and low is established within a fix
period. Lambert recommend using 1/3 of the cycle time which is from the high to the low,
or from the low to the high as the average setting. So if the cycle is 30 days then you
would use a 10 day for calculation of this CCI. I have chosen a 10 day here as well.
The calculation of the CCI is quite complicated. But you can always find the calculation on
our website. I will briefly explain to you what the CCI is made up of. So you know what
it tells you. It uses a typical price over the last 10 bars. That is the setting here.
It then uses a 10 Simple Moving Average of that typical. Then it uses mean deviation.
And after that Lambert adds a constant which is 0.015 to get his CCI. The reason why he
used this constant is so he can have his CCI reading 70-80 % of the time between 100 and
-100. What this CCI tells you is that when it is above 100 or below the -100 it is away
from typical price. So when it's above it tells us that it is out of normal price action.
When it's below its also out of normal price action. I will show you how to use these 100
and -100 levels for later. Lambert focused on movement above 100 and below -100. He consider
moves above the +100 to tell them that the commodity or stock is in a strong uptrend
and a move below -100 that the commodity or stock is in a strong downtrend. Ok now you
know what Lambert wanted to use this CCI for. You also know what this CCI tells you. So
now I will show you how to trade using this indicator. Trade using Commodity Channel Index,
CCI But first like with every other oscillator I like to use filters in order to improve
the odds of my trades. So first I add my MA. It's up sloping so the trend is up. I will
only take long plays. Second I look for a extreme reading in this CCI in the opposite
direction of the trend. This is to ensure that there has been enough correction or consolidation
in the stock in order for me to get a new up move. Third I look for a break of 100 to
the upside. Just like Lambert said. That is my entry. It happens here. And we get our
entry up on price action here. Modified Use Of Commodity Channel Index, CCI Since the
introduction of CCI traders has discovered various new ways to use the indicator. Many
traders use the +100 as overbought and -100 as oversold. I have colour coded my CCI to
give me the feel of this oversold and overbought scenario. Now I will show you how to trade
this new theory. I first identify sideways price action. I do that by looking at my MA
and see that it is relative flat. Also price is oscillating around the MA. Second. I look
for overbought CCI with divergence. That means price makes a higher high compared to this
high but the CCI makes a lower high compared to this high. And third I look for the cross
down through 100 so we are moving away from non-typical price. It happens here and it
means that this bar which closes here is your entry. Here is another way of using this CCI.
I have removed the colour coding on this CCI in order not to get confused about the overbought
and oversold signals. because this is a trendline break trade. So first I identify the trend.
I see that MA is down sloping. So the trend is down. I will only take trendline breaks
to the downside. Second I draw in a trendline in, connecting my lows on this CCI. It gives
me my entry here on a closed basis. If you see the trendline break on this CCI it gets
you in before the trendline break on price. Because you get in faster but still with confirmation
because the CCI trendline break, you are getting a better risk to reward because your stop
is smaller and your target is bigger. This ends today's video. I hope you have enjoyed
it. Please remember to subscribe to the channel so you don't miss out on future videos.