Next, we are going to present a technical trading system based on two well-known indicators, the CCI (Commodity channel Index), an oscillator that measures market momentum, and moving averages, one of the most used trend indicators. It is a simple and easy to apply system that uses a series of defined rules for opening and closing positions.
Therefore, we can say that it is a mechanical trading system , which requires little interpretation. It is a trend-following system that uses the crossing of two simple moving averages to determine the direction of the price and bullish or bearish signals of the CCI to determine if the market momentum confirms the trend signals of the moving averages. In other words, the CCI serves to filter the signals produced by the crosses of moving averages.
Since it is a methodology based solely on technical indicators, fundamental market events can affect its signals. Therefore, it is recommended that you avoid using the system during the publication of important news or critical events.
As always, it is recommended to test this trading methodology on a demo account before using it to trade on a real account.
- Configuration and indicators of the trading system with CCI
- Rules of the trading system
- System considerations
- Example of the trading system with the CCI indicator
Configuration and indicators of the trading system with CCI
- Recommended markets: This trading system was designed to operate in the Forex market (especially the major pairs), however it can be used to trade other instruments, such as precious metals and indices.
- Recommended time frames : The recommended time frames for this system are H1 and M15.
- Recommended Market Periods: It is recommended to use this trading system to trade during the US market session , between 7:00 AM and 5:00 PM Eastern Time.
- System indicators : The technical indicators used by this system are:
- 1 CCI (Commodity Channel Index) of 14 periods, where the horizontal lines -100 and +100 must be deleted and a line added at the +50 level.
- 1 simple moving average (SMA) of 9 periods.
- 1 SMA of 3 periods.
Rules of the trading system
It is a very simple and easy to operate system, where we look for the CCI to cross the +50 line from above or below to confirm the bullish or bearish signals of the moving average crosses. The rules for opening new positions are as follows:
A buy trade is opened when the following rules are met:
- The 3-period SMA crosses above the 9-period SMA (bullish crossover). This is the bullish signal that prepares us for the opening of the buy position.
- The line of the CCI indicator crosses from the bottom up the level +50 drawn in the indicator window. This signal confirms the bullish crossover of the moving averages.
- After these two signals occur, we open the buy position at the opening of the next candle.
- Stop loss: We can place the stop loss two pips below the last swing low.
- Closing the position with profit: We can close the position when the CCI crosses the line +50 down. You can also close the buy position once the price reaches a fixed profit target that is equal to at least the stop loss, to maintain a Risk: Minimum profit ratio of 1: 1.
A sell transaction is opened when the following rules are met:
- The 3-period SMA crosses below the 9-period SMA (bearish crossover). This is the bearish signal that prepares us for the opening of the sell position.
- The CCI indicator line crosses from top to bottom the +50 level plotted in the indicator window. This signal confirms the bearish crossover of the moving averages.
- After these two signals occur, we open the sell position at the opening of the next candle.
- Stop loss: We can place the stop loss two pips above the last maximum of the swing.
- Closing the position with profit: We can close the position when the CCI crosses the line +50 upwards. You can also close the buy position once the price reaches a fixed profit target that is equal to at least the stop loss, to maintain a Risk: Minimum profit ratio of 1: 1.
– If the system is operated completely mechanically, sometimes a good number of pips can be lost if the position is closed at the moment when the CCI crosses the +50 level in the opposite direction . Sometimes the market can move against with great force, causing the loss of many pips before the close signal occurs. Therefore, it is also advisable to use some discretion. For example, when we obtain more than 30 pips of profit, it is best to move the stop loss and place it 30 pips in favor, in such a way that if the market goes back, we can obtain at least 30 pips of profit and when we see that the market returns to move in the original direction, let’s re-enter the market and get more profit.
-Before starting our operations in the morning, we must take note of the time the market news will be published. Once we are in the market, we keep our attention on any economic data that is published that may affect our operations. Above all, it is important to pay attention to the most relevant economic indicators for investors. If the numbers are favorable, stay in the market until you get the exit signal. If the numbers go against you, get out immediately and take whatever benefits you already have. If you are an experienced trader, it is better to reverse your trade, as we will see later.
Example of the trading system with the CCI indicator
Chart of the GBP / USD currency pair with a buy operation generated by this system. The profit generated is 100 pips
In the previous image we have an H1 chart of the GBP / USD currency pair where a purchase operation was made with this trading system. As we can see, in this operation a good uptrend movement was caught. First, we have the bullish crossover of the SMA 3 moving averages over the SMA 9, which is confirmed by the crossover of the CCI oscillator above the +50 level, as shown in the previous image. Shortly after the crossing of the moving averages, the market started to rally strongly generating a good amount of profit pips. We place the stop loss below the last swing low (See previous image).
We keep the position open until the market reverses its direction and the CCI crosses down the +50 level. Once the position is closed, a profit of +100 pips is obtained, far exceeding the risk assumed in the operation with the stop loss.
Now that we have finished explaining this trend tracking system based on technical indicators, we would like to hear your thoughts on it. We invite you to leave your questions and comments in the comments section.