There are various ways traders use the CCI indicator. One example is to look for a prospect to sell when the oscillator exceeds plus 100 level or take a valid bullish signal when it dips below minus 100 level (oversold). Though this trading strategy is very popular, it also can cause huge losses if one is trading the oscillator instead of the price itself. In this instance, traders often use one commodity channel index instead of two or more indicators. To avoid this reliance on a single indicator, some traders prefer instead using a pro system in this case a two CCI system. This pro trading approach which uses two oscillators is a dual CCI trading method. At the end of this piece of writing, one will learn how to use the commodity channel index, a pro system, particularly how to use a dual CCI.
What is a dual CCI system?
It is a trading system that uses one short term oscillator and one medium, or one medium and one long term in view to identify trading signals. Typically, for day trading purposes, a day trader will use a combination of a short term and medium term indexes while a swing trader will use a medium and a long term. The settings that a trader will use depend on both the signal time frame and his or her own trading style. A trader may also consider the types of financial instruments he or she is trading. If a trader is a scalper seeking small quick short term gains, he or she may instead use a pair of short term indicators.
For example, a scalper may use two indicators: one for the period five and the other for eight (or seven and 12). When the oscillator period five crosses above the eight, theoretically, it indicates a buy signal on time frames such as one minute, two, three, or five minutes.
However, if the five goes below the eight, it will highlight a possibility to sell on the same time frames. Though this is quite straight forward, the reality is different if one does not know how to filter out CCI indicator fake signals.
A day trader may use the following settings: twelve and twenty four depending on the signal time frame or ten and twenty.
A swing trader may prefer period twenty and thirty. Note that these settings are directly dependent on the signal time frame and each financial instrument's cycle. In each case, traders must test and examine these settings and select the best profitable pro system.
How to avoid trading CCI like a robot?
To avoid this common trading style, one must always align the signals with the market patterns (not price patterns).
One can ask two crucial questions:
1/ where did the signal occur?
2/ and when did it occur?
The general rule is to keep away from all trading signals that take place at the wrong place and wrong time.
For example if a buy signal occurs in a declining channel, it is preferable to disregard it as long as the price is still in the channel. One must wait until it breaks above the channel, retests it and turns around. On the other hand, one will not take a sell signal when the price is in a positive slope channel. The best approach is to wait until the price breaks below the channel, retests it and turns around. If the market pattern is horizontal, one will use a consolidation trading tactics.
The role of commodity channel index indicator.
To use the oscillator more efficiently, one should first understand its function.
Its primary task is to indicate when a financial instrument deviates from a specific moving average.
When it reaches plus 100 or minus 100, it indicates an extreme deviation. In these instances, there is a high chance that it will return to the specific moving average selected as the temporary dynamic fair price.
Usually the price does not always return to the moving average in a short while after reaching the extreme levels. Note that if the intrinsic value has increased during the divergence, a new fair value is in place. Consequently, the new resultant fair value will exceed the previous acceptable fair price (the selected specific moving average). Equally, a new fair value is in place when the intrinsic value is decreasing while the price moves down away from the centred line. The key market principle in question here is the return to the mean.
Note that there will be no immediate return to the mean after an extreme deviation if the intrinsic value is changing (it is rapidly increasing or diminishing together with the current market price). It is vital that one thoroughly grasps this principle to avoid selling or buying anyhow when the oscillator reaches the acute regions. Note that the price is not always overbought at the same time when an oscillator reaches +100 and vice versa.
Understanding the commodity channel index crossings.
When a short term oscillator crosses below a medium term CCI it signifies that the medium term technical tool is sloping down. This is parallel to the Moving Average Convergence Divergence crossing below its signal line. It signifies that MACD is sloping down or has a negative slope.
Sometimes, MACD may be distorted when it is below its signal line. In this scenario, its slope may not be entirely negative.
On the other hand if the short term Donald Lambert's indicator goes above the medium term oscillator, it is a warning that the medium term CCI is sloping up. Note that correspondingly to a distorted MACD, false crossings do take place, or false signals are possible.
To avoid these traps, one must wait until the price validates these warnings.
It is always risky to use a dual trading system without understanding first how to use it. It is also one thing to know about technical analysis and another to know how to use it successful. Never use these crossings as buy and sell signals without using the trading triangle. Always keep eyes on the price and use the best risk-reward ratio for signals that occur either at a compelling support or resistance level.
Real dual CCI system
TS CCI PRO is a dual trading system, which uses two specific oscillators plotted jointly.