Commodity Channel Breakouts

The Commodity Channel Index (CCI) was first developed for trading commodities but can be used for trading currencies as the market is a highly liquid one.  The CCI was created by Donald Lambert in 1980 to identify cycles on the commodity market, as they believed that the highs and lows of every cycle could be predicted in advance. Commodity Channel Index is used as a momentum oscillator on the Forex market, to identify overbought and oversold conditions, bullish and bearish divergences, detect momentum shifts earlier and to anticipate trend reversal.

Figure 1: The CCI Indicator

Commodity Channel Breakouts Strategy

The Forex market exhibits a lot of false breakouts, which makes it difficult for beginner traders to successfully trade these patterns.  It is common to see a situation where there has been a breakout, the trader buys in, the market then reverses back into the previous range, and the trade closes at a loss. 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 when the CCI indicator shows a reading below -100 the momentum is to the downside. To successfully trade the Commodity Channel Breakout strategy use these steps:

Buy Setup Rules

1. Only use the Daily or the 1H chart using the CCI standard input of 20.
2. Look at the chart and find the last time the CCI broke above +100, before dropping down back below the +100 and record that measurement.
3. Buy when the market has a new CCI reading above +100 and breaks above the previously recorded reading from step 2.
4. Put your stop loss below the breakout candle.
5. Take partial profit once the market moves the same amount as your risk threshold, and move your stop loss to your breakeven.
6. Take profit on the second half of the trade once the market moves to two times your risk threshold.

Sell Setup Rules

1. Only use the Daily or the 1H chart using the CCI standard input of 20.
2. Look at the chart and find the last time CCI broke below -100 before breaking above the -100 and record that measurement.
3. Sell at the market once a new CCI reading goes below -100 and breaks below the previously recorded reading from step 2.
4. Put your stop loss above the breakout candle;
5. Take partial profit once the market moves the same amount as your risk threshold, and move your stop loss to your breakeven.
6. Take profit on the second half once the market moves to two times your risk threshold.

Trading Examples

Let's look at two examples of trading with commodity channel breakouts, one in a short trade example and one in a long trade. 

Short Trade Example

Figure 2 is an example of a short signal.  After 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 breakeven in the second half of our trade. But the trend clearly remained bearish after the stops were triggered.

Figure 2: EUR/USD 1H Chart

Long Trade Example

A long trade example is shown in Figure 3.  In this case, the market reached both targets. A new high in CCI momentum was the trigger for an explosive move in GBP/USD which demonstrates the very high level of accuracy of using the Commodity Channel Breakout strategy in timing trades on the FX market.

Figure 3: GBP/USD 1H Chart