In our last article, we introduced the Commodity Channel Index, or CCI as an unbounded oscillator. And while it shares some similarities with other oscillators such as RSI or Stochastics, it’s also unique in the fact that it’s unbounded. It also takes into account candlestick wicks, which makes for a much more volatile reading in the oscillator, apples to apples, as what might show in something like RSI.
This can also lead to more signals from the indicator, although the reliability of those signals may be less than what’s shown on another oscillator such as RSI. This higher frequency of signals often comes with a lower degree of reliability, but the trader has options in that case in the effort of making the signals a bit more consistent.
As we’ve looked at before, moving averages can be used as a trend filter. This way, traders can look to only place trades in the direction of the general trend, and triggering the position can take place via a ‘trigger’ of some sort, and the Commodity Channel Index can certainly be used for such a purpose.
On the below chart, I’ve added a 100 day moving average to the daily chart of EUR/USD, and the CCI is applied in the lower portion of the image. The logic of the strategy would investigate bearish setups when prices are below the moving average and CCI crosses down and below -100, while bullish setups would be looked at when price is above the moving average and CCI crosses up and over +100. Bullish signals have been marked in blue while bearish signals are reflected in red. I’ve also added two green boxes on the CCI indicator, which I’ll explain after the chart.
Chart prepared by James Stanley, EUR/USD Daily, Jan 2021 - March 2022
First things first, this is but one example, so usual caveats apply: Markets are unpredictable and there’s no way of assuring that this performance is replicated in the future, as there’s a litany of unknowable variables.
But, from this one example we can find some key take-aways. A strategy of this nature is going to be exposed only during really strong trends, as highlighted by the agreement between CCI and the moving average juxtaposition. There’s also going to be fairly quick exits if using indicator logic, as CCI would quickly cross back-above -100 or back below +100.
But, there’s also some missed signals, as shown by the two green boxes. CCI offered a signal ahead of the price move in both instances, but price was on the opposite side of the moving average at the time; so each of those boxes are highlighting a signal that couldn’t be taken because of the trend filter. So this is something that could be investigated on additional planning, perhaps the moving average can use fewer periods to show faster responsiveness, or maybe the moving average is scrapped altogether in favor of a more subjective trend diagnostic, such as price action.
But from this example, traders can then move to optimizing the basic logic into something more befitting of their personal style and their goals for their own trading strategy. CCI can be an interesting trigger to investigate for such approaches.
--- Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.