What is the Double CCI Trading Strategy?
The Double CCI Trading Strategy is one of many strategies where traders of various levels and experience try to use indicators in order to better predict the market, and improve the accuracy and overall success rate of their trades.
Like many other trading strategies, the Double CCI Trading Strategy has been used with varied success, with some claiming that it is one of the best strategies and others claiming that it is grossly misused, and therefore largely unsuccessful.
But, in order for a person to better understand the benefits, as well as the potential problems of using the Double CCI Trading Strategy, let's first look at how it works, and how a typical trader would use this strategy.
Double CCI Indicator
The term 'CCI', refers to the indicators that are used. So the term Double CCI Trading Strategy would refer to the use of two CCI indicators set at various levels.
Like many other indicators, the CCI (Commodity Channel Index) attempts to predict when a particular stock is overbought or underbought, and as a result, predict when the direction of stock movement will change.
An important principle to remember is that as demand for an item goes up, so does the price for that item. As demand for an item decreases, so does the price. It is basic economics.
Now the average person might think that when a stock starts dipping, it will continue to plummet in a downward, bearish direction unless something drastic happens to change that, and the same could be said for a stock moving in an upward, bullish direction.
But, the reality is that stocks tend to move up and down throughout the day. When they get particularly low and are underbought or oversold, a lot of investors see this as an opportunity to buy a valuable stock at a far lower price than they would otherwise be able to. This large and sudden influx of buyers can cause a sudden increase in the stock price and a change in overall direction.
Likewise, when a stock is overbought or undersold, some investors might consider that stock to be more expensive than it is actually worth, and cease buying it. This sudden change in demand for the stock will cause the stock to lose value.
A CCI Indicator can be set over different periods in order to illustrate whether a stock can be seen as over sold or undersold over a period of time. Generally, it is believed that when the indicator crosses the zero, moving downwards, the stock is moving toward underbought, and the closer it gets to -100, the more likely it is that a sell of will occur. Likewise, the opposite is true. If the indicator crosses the zero moving upwards it indicates that the stock price is moving towards overbought, and the closer it gets to +100 the more likely it is that strong buying action will occur.
The Indicator doesn't only oscillate between +100 and -100, but has been seen to move much higher or lower than that.
How to Use the Double CCI Trading Strategy to Predict Trend Change
The Double CCI Trading Strategy can make use of multiple different CCI periods, although the general opinion is that, for most daytraders, it is most beneficial to have your first indicator period set at around 10, and the other at around 100.
The reason for this is the fact that the different periods should support and confirm one another. Although it is important to be able to spot a change in trend when trading, many traders wait for a trend to be confirmed before they place their trades. So, if the double CCI trading strategy is used with periods of 10 and 100, then a person would wait until the CCI with the shorter period (10) moves across the zero line, in the direction that has been confirmed but the longer period (100). After the general trend in a direction has been confirmed, many like to enter a trade.
This can be seen confirmed in the below figure of the EUR/USD on 1 March 2022. Observe the CCI 100 line (blue), crossing over the zero (grey) towards -100 (red), while the CCI 100 (purple) is already well below the zero line. The more negative the CCI 100, the stronger the singal would be considered to be. This movement in the two CCI figures is followed by a rapid selling off in the EUR/USD, as is seen in the candle stick graph.
However, once with the shorter and longer periods reach -100, this may be a strong indication that the stock is considered to be overbought when considering both a longer and shorter period, and may indicate that it is time to exit the trade.
The Problem with the Double CCI Trading Strategy
According to Brandon Wendell, the CCI indicator can prove to be quite useful in terms of retrospective analysis. In other words, the best way to use them is to study the market trends after the movement has already happened.
Unfortunately, it is not a very good idea to use any sort of technical indicators in order to help you predict when to buy or sell a certain stock. One of the reasons for this is the fact that the figures on all indicators form as the market moves. Your CCI indicator may have crossed above 100, but if the market drops down a few moment later, then the indicator would automatically adjust, dropping back below 100, adjusting the entire line so that it never appears to have crossed 100 at all.
A lot of traders try to fix this problem by using multiple indicators, perhaps multiple CCI indicators, set over various periods, or CCI indicators in combination with other indicators such as RSI (Relative Strength Index), but this lag doesn't only occur with the CCI indicator, it occurs with all indicators, making them not only a tool that is sometimes flawed, but a tool that could dangerously mislead in some cases.
How can the Double CCI Trading Strategy Help Me!
Many like to use the Double CCI Trading Strategy for Scalping specifically, but the dangers of relying on an indicator to make a trade has been mentioned before. Instead, the use of the indicators in this strategy can be used to confirm possible trade opportunities that would then have to be further assessed with regards to the general trend of the graph amongst other things.
Additionally, these indicators could be used as a good indicator of when it might be time to exit a trade that is already profitable.
If used correctly, the Double CCI Trading Strategy can be a useful tool to help you trade with better accuracy, and maximise profits.