Forex Trading Price Action Is Better Than Using the CCI

There’s a newer article on Investopedia titled "Channel Breakouts with the CCI" by Schlossberg and Lien.  I read it and don’t see why you would want to use this strategy when there’s a much better alternative.  

You can read the article to get a more in depth explanation of the strategy but I’ll try to give a quick synopsis.  The strategy looks to trade higher highs and lower lows of the commodity channel index.  For a long trade, you wait for a reading to exceed +100 and enter a trade on the close of the candle if the reading exceeds the previous peak reading.  For a short trade, you do the opposite.    I remember reading about this strategy a couple of years ago when I was an indicator junkie.  I found it appealing but that was then.  Now, I use indicators at an absolute minimum.  

If you want to trade momentum especially intraday, you have to get on quickly while it lasts.  I don’t think a lagging indicator allows you to do this.  There’s a simple alternative to this strategy, trade breakouts of previous day highs or lows.  There’s other alternatives too if you just set your mind to finding them and doing testing.  For instance, you can follow all the rules of the strategy but not use the CCI, use price peaks instead.   Remember, every indicator is a derivative of price.  

Looking at charts, the CCI indicator is always late to the game and sometimes falsely identifies areas of momentum especially when the price is trading in between the previous days high and low range.  So while I can’t say that this strategy won’t make you money, I think that there are other ways of identifying momentum that give you a better chance.  

Popularity: 4%

Forex2Stay is Back

I just wanted to let everyone know that Brent from Forex2Stay after a brief hiatus has started his blog posting again.  I speak to Brent via email now and again and enjoy the insights and guidance he has to offer.  I'm glad he has decided to start posting again.   Anyway, you can find his blog at http://forex2stay.blogspot.com.

I have reference to Woodie's CCI on this site so I thought I'd mention a post by Globetrader related to Woodie's CCI that is worth reading.  http://globetrader.blogspot.com/2006/10/worth-article.html

I'm tapped out content wise and I'm having a bit of writer's bloc today.  See ya…. 

Popularity: 2%

Regular vs. Hidden Divergence

I realized today that unbeknownst to me, regular divergence and hidden divergence are absolutely and totally different beasts.  In fact, I'm not even sure if I knew about hidden divergence.  What this means is that I may have been classifying regular divergence as hidden divergence and vice versa.  This is my mistake, one in which I don't want you to make too.  So I am going to reference some material to give an overview of both types.

Divergence happens when price makes one pattern and a corresponding indicator makes the opposite pattern.   You can use any indicator but the most commonly used are RSI, MACD, CCI, or Momentum.  I'm going to go through the process of identifying 4 types of divergence.

The first type is Regular Bullish Divergence.

Characteristics:  

• Occurs in a downtrend
• Possibly signals the end of a downtrend
• Possible bullish correction
• Lower lows in price
• High lows in indicator

#1

 

 

 

 

 

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The second type is Regular Bearish Divergence.

Characteristics:

• Occurs in an uptrend
• Possibly signals the end of an uptrend
• Possible bearish correction
• Higher highs in price
• Lower highs in indicator

#2

 

 

 

 

 
 

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The third type is Bullish Hidden Divergence.  

I would have simply called this next type of divergence regular bearish divergence in the past and I would have also expected it to have the regular bearish divergence characteristics above.  Let's first look at a chart of Bullish Hidden Divergence.

#3

 

 

 

 

 

As you can see, the price continues its ascent because Bullish Hidden Divergence is a continuation pattern.  You have to look closely but look at the MACD in the chart #3 above as opposed to the MACD in chart #2.  In chart #3, the price is making higher highs and the indicator is making lower lows and the MACD in chart #3 IS ALREADY IN OVERSOLD TERRITORY.  This is quite different than chart #2 as MACD is still in positive territory.   

Characteristics:

• Trend continuation
• Higher highs in price
• Lower lows in indicator

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The fourth type is Bearish Hidden Divergence.

This too is a continuation pattern as the bearish trend is expected to continue.

#4

 

 

 

 

 

You also have to look closely at the MACD in chart #4 above.  The MACD is already in overbought territory and the indicator is making higher highs.

Characteristics:

• Trend continuation
• Lower highs in price
• Higher highs in indicator

This isn't the easiest thing to explain.  Just look closely at the four charts above and the four different types of divergences shouldn't be hard to see.

Popularity: 5%

Yesterday’s Trade Strategy

 Yesterday’s Trading Opportunity

Pictured below is an hourly chart of the EUR/JPY.  The green channel is called the Keltner Channel and the indicator at the bottom is the CCI or Commodity Channel Index.  My short came at around the purple downfacing triangle.

My rationale for this trade was that the price before I entered was hovering above the top channel line indicating that the price may have reached exhaustion.  Now there is no guarantee that exhaustion had been reach yet in this case.  The price could have continued to go up.

The key here is to wait to see if the candle closes below the upper channel line which it does.  Once it does, a selling opportunity arises and can be furthur confirmed by the CCI which in this case had begun to fall below the 100 level.  In addition, I looked at other momentum indictors and they showed similar findings.

I initiated a short at 142.26 once the indicators confirmed this.  The Keltner Channel as well as other channels expect that price will gravitate towards the median line 80% of the time.  I was betting that gravity was on my side.

The price retraced a bit to the top line of the channel once my short was in but then declined and passed through the median line.  I had place a stop at the high of the previous candle which was never close to being hit.  

Once momentum slowed, I got out of the trade for a 43 pip profit x 2 lots = 86 pips.

 

 

 

 

 

 

Popularity: 4%

Week 5 Performance

This week was my most profitable since I started "the project" 5 weeks ago.  I profited 289 pips for a total of $2450.  This was a 22% increase of capital. 

By week, here are my profit % of balance:

week 1    +6.5%
week 2    +7.0%
week 3    -0.5%
week 4    -2.0%
week 5    +22.0% 

I made a lot of my trades this week using the 30, 60 and 240 minute charts of 5 currency pairs: EUR/USD, USD/JPY, USD/CHF, GBP/USD, and GBP/JPY.

I relied on making trades near or at support or resistance mostly using CCI, RSI, and momentum as confirmation along with a couple of other indicators.  I don’t know if you would call this a trading system but nevertheless, this has worked for me over the weeks.

1.   Identify support/resistance on 240 minute or daily chart
2.   Draw upper/lower trendlines on RSI and CCI indicators of 30/60/240 minute charts.  
3.   If bounce off CCI trendline, take the trade direction of bounce
4.   Confirm furthur with RSI and momentum
5.   Place stop (1 pip + pip spread) above resistance.  If the stop is at a round number move the stop another pip; same process for support
6.   Use fibonacci or 8/21/50/100/200 EMA’s to set target price for exit

This method is nothing new or exciting.  I’m applying very common principles here.

I hope everyone had a great trading week.  Let’s do it again on Monday.  Have a good weekend. 

Popularity: 3%

Week 4 Performance Review

Yet another week with low volume where we see Friday prices positioned at the low or high for the week with the advantage going to the USD:

Ranges for the week

EUR/USD: 1.1778-1.1931 (currently 1.1788)
GBP/USD: 1.7129-1.7408 (currently 1.7189)
USD/CHF: 1.3050-1.3197 (currently 1.3182)
USD/JPY: 116.17-118.16 (currently 117.84) 

Week 4 was another losing week for me (-15 pips, -$242, 4 winning trades, 6 losing trades)

After 4 weeks of trading, I’m still up 123 pips and $1100.  If I were trading full-time, the $1100 wouldn’t be enough to cover a majority of my expenses this month and I’d probably be homeless.  That is why I’m holding on to my full-time job for now until I can see consistent returns.

This week my charts got "fatter" as I added more indicators and moving averages. 

In week 1 and 2, I was in "Raghee Horner" mode and my charts only had the wave and MACD indicators.   Weeks 1 and 2 just so happened to be my most profitable.  I wasn’t comfortable with just going through the motions of using only her strategy so in weeks 3 and 4, I’ve been experimenting more with EMA’s (8,21,50,100,200), CCI (Thanks Andrei), candlestick patterns, and other indicators like momentum, stochastics, RSI, and bollinger bands.  Weeks 3 and 4 might have been a good week to take a sabbatical to just watch the charts and train my eye to spot patterns as they emerge as Andrei mentioned in one of his helpful comments this week.

In the meantime, I’m reading a lot and trying to learn as much as possible.  I followed others advice and picked up a copy of "Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude."  I’ve also been lightly reading, "The Candlestick Course" by Steve Nison and "Day Trading the Currency Market" by Kathy Lien.  Lien’s book is much better than I thought and has given me additional insight into the market that I otherwise would have missed.

Happy New Year!

Popularity: 4%