Commodity Channel Breakouts

The Commodity Channel Index or CCI was first developed for trading commodities, but it can be used on any instrument as long as it has a high liquidity and the Fx market is the world’s most liquid market.  The CCI was created by Donald Lambert in 1980 and was originally used to identify cycles in commodities. The reason for creating this indicator was that Lambert, as well as many other traders, believe that every commodity or stock moves in cycles where the high and the low can be predetermined in advance.

The Commodity Channel Index is a versatile momentum oscillator that can be used to identify overbought and oversold conditions, bullish and bearish divergences and can also be used to detect momentum shifts earlier and to anticipate trend reversal.

CCI-Indicator

Figure 1: The CCI Indicator

Commodity Channel Breakouts Strategy

Beginner traders encounter a lot of problems in successfully trading breakouts because the Forex market exhibits a lot of false breakouts. It commonly happens that after there has been a breakout and once you buy in, the market reverses back inside the range and you end up losing money. This is a very common situation and a very frustrating one.

From above, the CCI indicator is extremely sensitive to the constant changes in price and it’s a good measure of momentum. If the CCI indicator shows a reading above +100 it indicates that momentum is to the upside, and like in the laws of physics if an object is in motion it will continue to stay in motion until it finds an obstacle – so the belief here is that the price will continue to move higher.  The same is true in reverse when the CCI indicator shows a reading below -100. That said, here are steps to use the Commodity Channel Breakout strategy:

The Buy Setup Rules:

  • Only use the Daily or the 1H chart using the CCI standard input of 20;
  • Look at the chart and find the last time CCI broke above +100 before dropping down back below the +100 and record that measurement;
  • Buy at the market once a new CCI reading goes above +100 and breaks above the prior recorded reading;
  • Put your SL below the breakout candle;
  • Take partial profit once the market moves the same amount as your risk threshold, and move your SL at BE;
  • Take profit on the second half once the market moves two times your risk threshold;

 

The Sell Setup Rules:

  • Only use the Daily or the 1H chart using the CCI standard input of 20;
  • Look at the chart and find the last time CCI broke below -100 before breaking above the -100 and record that measurement;
  • Sell at the market once a new CCI reading goes below -100 and breaks below the prior recorded reading;
  • Put your SL above the breakout candle;
  • Take partial profit once the market moves the same amount as your risk threshold, and move your SL at BE;
  • Take profit on the second half once the market moves two times your risk threshold;

Trading Examples

In Figure 2 we have an example of short signal.  After there was a new low in momentum represented by the CCI indicator, the prevailing bearish trend continued to extend to the downside and the total potential profit from this trade was only 35 pips after we were stopped at BE in the second half of our trade. But we can clearly see that even after we got stopped the trend remained bearish.

Figure 2: EUR/USD 1H Chart

Figure 2: EUR/USD 1H Chart

A long trade example is shown in Figure 3.  In this case, we can see the market reaching both of our targets. A new high in CCI momentum was the trigger for an explosive move in GBP/USD which clearly shows that the Commodity Channel Breakout strategy has a very high level of accuracy in timing the next move in the market.

Figure 3: GBP/USD 1H Chart

Figure 3: GBP/USD 1H Chart