CCI Breakout Forex Trading Strategy

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CCI Breakout Forex Trading Strategy

Many of us traders have heard of trendlines, support & resistances, and breakouts. Many of us have used it. Some might even have had good results. But there are other unconventional ways to trade trendline breakouts. Not only are they unique but more importantly, they work. It would be pointless being unconventional if it doesn’t work.

Trendline breakouts are traditionally used on candlestick charts. But this time around we will be explore using trendline breakouts on oscillating indicator windows.

This technique couldn’t be applied on all oscillating indicators though. Some just works better than others.

You may wonder why trendlines could apply to oscillating indicators. Shouldn’t trendlines apply to price itself? Well, indicators are also derived from price. The difference is that indicators try to smoothen out price movement and lessen the noise of small price fluctuations. Since indicators are derived from price, some oscillating indicators do mirror price movements and price action closely. Some of these indicators mirror price action close enough that the actual highs and lows on the price chart corresponds to the highs and lows on the oscillating indicator window, only that on the indicator window, the figures bob up and down in a tighter space.

When these highs and lows are connected, they form trendlines. Trendlines which could indicate support or resistance and could also indicate breakouts. These oscillating indicator breakouts will be what we will be looking for.

The Setup: CCI Breakout Strategy

As the title suggests, the indicator that we will be using will be the Commodity Channel Index (CCI). The CCI seems good for this type of strategy because of how it closely resembles price action. The peaks and valleys on the CCI corresponds even with the minor highs and lows on the price chart. Also, because of the jagged characteristic of how CCI is plotted, the peaks and valleys are easier to identify, which also makes identifying supports and resistances on the CCI window much easier.

Buy Entry:

  • A resistance line should be clearly identifiable when connecting peaks on the CCI indicator
  • Wait for a breakout above the resistance
  • Enter a buy market order at the close of the candle corresponding the CCI breakout

Stop Loss: Set the stop loss at the fractal formed by the bullish thrust

Take Profit: Set the take profit at 2x the stop loss risk

Sell Entry:

  • A support line should be clearly identifiable when connecting valleys on the CCI indicator
  • Wait for a breakdown below the support
  • Enter a sell market order at the close of the candle corresponding the CCI breakdown

Stop Loss: Set the stop loss at the fractal formed by the bearish thrust

Take Profit: Set the take profit at 2x the stop loss risk

Conclusion

The logic behind this strategy, although not as straightforward as other strategies, does have some merits in it. But the important thing is that it does work. This is a working strategy that I’ve seen many traders do use.

It does have its pros and cons though compared to traditional support and resistance breakout strategies. The advantage of the traditional support and resistance breakout is that it is more direct with price. The supports and resistances drawn are actually the points of the actual prices peaks and valleys, which are also natural supports and resistances. On the other hand, drawing supports and resistances on the indicator window such as the CCI also has its plausible merits. For one, it should have less noise as the indicators have the tendency to smoothen out price movements. Another notable characteristic with this method is that because indicators tend to compress figures in a set range, supports and resistances are easier to find.

It is up to you as a trader to weigh whether the advantages of using this method of drawing trendlines outweighs the advantages of using the traditional breakout strategy. However, there are other traders who use this strategy in conjunction with traditional supports and resistances. If they don’t find supports and resistances on a naked chart, then they have other opportunities with the CCI indicator breakouts. Others also use this method in conjunction with other CCI based trading strategies such as divergences. All in all, it is up to you as a trader to decide how to make this your own or use this as part of a bigger strategy.

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