How many times have you heard about the "metaverse" but haven't really taken the time to understand what it is? Maybe you think it has something to...
7 min read
Al Hill : Mar 21, 2022
Last Updated: May 19, 2022
Alton Hill is a Cofounder at TradingSim. He has a passion to help people and found that one of his ways of doing so, is through the world of Day Trading. Alton’s skillset is in Product Development and Design Thinking which he uses to write and improve the overall experience for TradingSim.
The commodity channel index (CCI) is an oscillator used to identify cyclical trends in a security. It gained its name because it was originally used to analyze commodities. While the CCI will oscillate above and below the zero line, it is more of a momentum indicator, because there is no upward or downward limit on its value. The default period for the CCI indicator is 14 periods, just as the slow stochastics and RSI. Remember, if you choose to use a shorter setting, the number of signals and sensitivity of the indicator will increase.
Traders have now begun to not only use the CCI to trade commodities but also for stocks as well. A rule of thumb for the commodity channel index indicator is that oversold is – 100 and overbought +100. While traders will look for divergences in the CCI and the price trend, trend line breaks of the CCI are also very popular. The real story about the CCI is not the indicator, but the community that has been developed around the indicator. An independent trader Ken Wood has created the “CCI University” that teaches detailed methods on how to trade profitably with the CCI.
Since you now know the basics of the commodity channel index indicator, I want to explore how to use this powerful indicator when day trading.
First of all, you should remember that the CCI indicator is not a good standalone tool. Like any other oscillator, the CCI needs to be combined with an additional trading tool.
In this article, we will combine the CCI indicator with the stochastic RSI.
The first strategy we will cover is a scalping method that will allow you to hit and run for small profits on a 5-minute chart.
The upper indicator is the commodity channel index indicator and the lower indicator is the stochastic RSI.
Here are the rules of this strategy:
CCI + SRSI Trade Entry
To open a trade based on the CCI + SRSI trading strategy, you will need to receive two matching signals from both indicators. These could be overbought/oversold signals, divergences, or trend breakouts.
Whenever you get a signal in the same direction from each of the indicators you should follow the direction of the respective signal (short or long).
CCI + SRSI Stop Loss
The stop loss rules of our scalp commodity channel index strategy are pretty straightforward.
You can simply use price action techniques to determine the proper location of your stop.
For example, if you are buying, you should look for a bottom located near your entry point. Simply place your stop loss below this point.
On the other hand, if you are shorting the stock, you should look for a top near your entry price. You will then use this high for your protective stop loss.
CCI + SRSI Profit Target
The rules for taking profits with this strategy are even simpler than the stop-loss rules.
You should close your trades whenever the CCI or the SRSI gives you a signal in the opposite direction. It may be an ordinary overbought/oversold signal, or it can also be a divergence or a trend breakout on one of the indicators.
Now let’s review these three rules in the below chart:
The first two green circles on the image above show the two matching signals from the CCI and the SRSI.
After the CCI line goes in the overbought area, it then breaks downwards creating the first signal.
At the same time, the lines of the stochastic RSI are also in the overbought area. The second signal comes when the two SRSI lines cross downwards as well.
This is a short signal and we sell the security.
We then place our stop loss order right above the most recent top. This is highlighted with the red line on the image.
The take profit signal comes when one of the indicators give us an opposite signal. This happens when the CCI line enters the oversold area, which is shown by the rightmost green circle.
Now we will apply all the rules we discussed above into a complete trading strategy. We will add the CCI and the stochastic RSI on our chart as described in the strategy.
Above is the 5-minute chart of Twitter from June 6, 2016.
The chart depicts five trades based on signals from the CCI and SRSI. The green circles on the two indicators show when each was aligned and we opened a trade.
The red horizontal lines on the chart show where we placed our stop-loss orders for each trade.
Now that we have established the ground rules, let’s walk through the five trade examples:
The five scalp trades with Twitter generated a profit of about 2% of the invested capital. At the same time, the longest trade took 1 hour and the shortest one took 20 minutes. This is why this trading strategy falls in the category of scalping.
For some of you, 20 minutes is far from scalping, but the key point is the small gains and not necessarily the length of time in each trade.
Let’s now go through another trading example of the SRSI and the CCI indicator settings.
We now have the 2-minute chart of AT&T from June 27, 2016. The image illustrates three trading examples based on the CCI indicator trading strategy in combination with the stochastic RSI.
In these three trades, we generated a profit equal to about 1.00% with our CCI scalp trading strategy. The first and third trade took about 20 minutes each. The second trade took about 40 minutes.
Relative volume is one of the most important indicators for day traders. It can help you determine when a...