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The CCI MoMo Trade

The CCI MoMo Trade

2011-07-07 01:34:00
James B. Stanley,

The CCI ‘MoMo’ Trade

One of the most common questions that we receive as Trading Educators is: “What indicator should I use?”

Many traders are under the belief that the secret to profits lies in the indicators used. Don’t worry – I also harbored that belief when I first found this beautiful art of speculation. Through trials, tribulations, and draw-downs, I learned that indicators were just that – a simple indication. They didn’t tell me much more than price already did, and they definitely did not provide a ‘crutch,’ on my way to trading profitably. But when used effectively – they can assist me with the factors that I DO have in my control, such as trade, risk, and money management.

CCI, or The Commodity Channel Index, is a fascinating indicator: It was developed in 1980 by Donald Lambert.

I’m personally partial to CCI as I can use the indicator in multiple market conditions. If the market is ranging – I can trade ranges. If the market is trending with a lot of strong momentum (also called ‘MoMo by traders), CCI can help me trigger my entries. The key here is the trader – and the traders’ identification of the correct market condition so that CCI can be employed properly.

One of the tenets that we vigorously teach in the DailyFX+ Trading Course is the importance of trading with the Trend. I’m of the belief, as are the rest of the DailyFX Education group, that while counter-trend trades may potentially work, taking trades in the direction of the trend can be far more amenable to the traders’ goals.

Let’s take a look at the “CCI Momo,” strategy to get an idea for how some traders approach momentum situations with CCI.

If we pull up a daily chart and add a 55 period Moving Average, we have what can be looked at as a ‘Trend Proxy.’

When price is above the MA on the Daily Chart – I only want to take long trades (indicating that the trend is up), and when price is below the MA (showing me that the trend is down) – I only want short positions.

The_CCI_MoMo_Trade_body_Picture_1.png, The CCI MoMo Trade

Created with Marketscope/Trading Station 2

Now that I know what direction I want to trade this situation, I can go down to my shorter time frame chart. If I’m using the Daily for trend analysis, I’m often using the 4 hour for entries. I’ve included below a brief synopsis of the timeframes I’ll employ when using multi-time-frame analysis. If you’d like to find more information, we do a Live Webinar in the DailyFX+ Trading Room once per week on just this topic: Multi-Time-Frame Analysis. If you’d like to view the schedule, as well as our archived sessions (you can locate the previous Multi-Time-Frame Analysis session in the archived video player), please click on the link below:

DailyFX+ Trading Room

Multi-Time Frame Trend, and Entry Chart Timeframes

Trend Identification

Entry Chart

1 week

1 day

1 day

4 hour

4 hour

1 hour

1 hour

15/5 mins

When on the 4 hour chart, this is where I begin analyzing the CCI readings. In the case of long positions, I’m looking for CCI to penetrate the +100 line (please see below):

The_CCI_MoMo_Trade_body_Picture_3.png, The CCI MoMo Trade

Created with Marketscope/Trading Station 2

For short positions, I’m looking for the same thing – only reversed. Please see below for a diagram of CCI for short positions:

The_CCI_MoMo_Trade_body_Picture_5.png, The CCI MoMo Trade

Created with Marketscope/Trading Station 2

Putting it All Together

Let’s look at a full trade setup to get an idea for how the CCI Momo trade would be plotted.

USD/CHF has been in quite the bearish down-trend. From my Daily Chart (below), we can see that ‘Swissie,’ has priced down over 2500 pips since June of 2010. Also – key for myself in this strategy – price is trading nicely below the 55 period Exponential Moving Average:

The_CCI_MoMo_Trade_body_Picture_6.png, The CCI MoMo Trade

Created with Marketscope/Trading Station 2

In these situations – there is really only one way in which I’m interested in playing this. I only want short positions. Even though the trend *can* or *may* turn around, I don’t want to risk my hard-earned money on that potential prospect.

Upon performing my trend analysis, I decide, due to the strong down-trend and the fact that Swissie is below my 55 period EMA, I want to look for short position on the USD/CHF chart. Because I’m using my Daily Chart for trend analysis, I’m going to use my 4 hour chart for entry.

The_CCI_MoMo_Trade_body_Picture_7.png, The CCI MoMo Trade

Created with Marketscope/Trading Station 2

Let’s take a quick look at a long setup as well:

The NZD/USD currency pair has been on a momentous tear – continuing to make new all time highs. As it continued to climb higher, CCI offered numerous ‘MoMo,’ entries (Please see below).

The_CCI_MoMo_Trade_body_Picture_9.png, The CCI MoMo Trade

Created with Marketscope/Trading Station 2

This is just one of the many strategies that we talk about in the DailyFX+ Trading Room.

If you haven’t joined us in the DailyFX+ Trading room yet, please feel free to come by and see what we offer to all Live FXCM Clients. On top of the DailyFX+ Trading Course, we host live webinars 3-4 times per trading day in which we chart and diagram our trades, and student-traders can ask us questions in real-time about strategies, setups, or current market conditions. You can navigate directly to the DailyFX+ Trading Room from the link below:

DailyFX+ Trading Room

If you don’t yet have a live account with FXCM, you are certainly welcome to request trial access to the DailyFX+ Client Suite that is available to every live FXCM Client. You can request trial access from the following link below (sign-up field located to bottom right corner of page):

DailyFX+ Trial Access

To join James Stanley’s distribution list, please click here.

Thank you very much for your time, and Happy Trading!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.