Indicators based trading system is getting very much popular nowadays with the advancement of technology. Many professional traders are using only one or two indicators and executing high-quality trade setup in their trading chart. However, there are some novice traders who often think that by overloading their trading charts with tons of indicators they will be able to find the golden trade setups. But in order to find a quality trade, you need to keep your trading charts clean and consider indicator as helping tools only. In today’s article, we will briefly discuss the CCI based trading strategy used by experts in the Forex industry.
What is CCI indicator?
Before you use any indicators it’s highly imperative that you know that proper functionality of that indicators. CCI stands for Commodity Channel Index and commonly used by the traders to identify the trend reversal in the market. Many traders often use it to find the overbought and oversold conditions of certain currency pairs in the higher time frame.
Let’s see a classic trade setup with the CCI indicator
Figure: Bullish rejection at the key support level with an oversold value of CCI
In the above figure, you can clearly see that the price formed a nice bullish trend after it rejected the key support level. In this trading strategy, we will use two value of CCI indicators. If the reading of the CCI indicators stays above the positive 100 line then it means the pair is in an overbought condition and the price may reverse at any time after hitting the critical resistance level. And when the value of the CCI is below the negative 100 line it means the price is in an oversold condition and it may reverse any time after hitting the critical support level.
Though the system is very simple we will tweak this strategy to make it work better. Instead of placing random long and short orders at the key support and resistance level we will also use price action confirmation signal. In the above figure, you can clearly see that the bullish pin bar has formed right at the support zone of the pair before the price shoots up. So our first target is to find the key support and resistance level of the market. Once we find it we need to find the long term existing trend of the market so that we can execute our trend in favor of the long term trend. In order to find the long term trend in CCI trading strategy, we will use only the weekly chart and daily chart. Once we find the long term trend of the market we will switch back to the 4-hour time frame to find and wait patiently for any bullish or bearish price action confirmation signal. In the above figure the bullish pin bar formed right at the support level and after that, the traders look at the reading of the CCI indicators. Since the CCI indicators gave oversold readings it the professional traders considered it as a green signal to execute the trade.
Though CCI trading strategy is very much profitable yet you should always trade the market with proper risk management. No one can predict the price movement with 100 percent accuracy. So your main focus should be on high-risk reward ratio trade execution.