Hello Folks,
I have been testing a strategy for sometime (please excuse me if someone else already has posted it here) and have found that it MAY offer decent risk reward ratio.
Few things before we come to the strategy.
I am learning to be a swing trader and hence a newbie in TA. I do not understand AFL or Metastock:lol: I just use EOD charts on Chart Nexus. I am yet to do actual trades on this method.
The idea of coming up with this strategy was to take swing trades based on probable short term trends, not being glued to the PC the entire day and trying to catch the small moves, and a strategy that could be used to a wide spectrum of instruments.
Coming to the strategy:
What is Commodity Channel Index?
Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can successfully applied to indices, ETFs, stocks and other securities. In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. In this manner, CCI can be used to identify overbought and oversold levels.
The Commodity Channel Index (CCI) can be used as either a coincident or leading indicator. As a coincident indicator, surges above +100 reflect strong price action that can signal the start of an uptrend. Plunges below -100 reflect weak price action that can signal the start of a downtrend.
Strategy:
Condition:
Entry:
The 5SMA should cross the 20SMA, price should either be crossing the 20SMA or above it (for long) or below it (for short).
CCI reading > 40 (for long) or < -40 (for shorts).
All the above on daily charts. I do not use intraday charts and hence not tried on the same.
Why 5SMA and 20SMA?
5 SMA shows sentiment of traders for past week and 20 for past month.
Why CCI over/below 40 and not 100?
I have observed that by the time CCI hits 100, half of the rally is done and little is left for retail traders. You can choose to use 30 or 50 instead of 40, but 40 sees to be a stable figure and you will be able to catch the move early with some comfort.
Best Case Scenario: If you find a triangle, wedge or any other pattern with this setup then take this trade with outmost confidence.
Stop Loss: Best is to keep it at 1 ATR (Average True Range). However, you can tweak the same as per your risk appetite.
Exit: 2% on both index and stocks however you can tweak the same as per your wish.
Gapup/Gapdown: If CCI is extremely high or low (+-200 or more) then dont take the trade. Wait for the prices to find some sense and then take the trades.
Disadvantage: Whipsaws, however, with the CCI, you would avoid most of such trades. Also, if not sure then check Bollinger to see if the bands are contracting.
Thats it. Thats the entire strategy.
Anyone willing to backtest this please feel free to do so. Valuable suggestions, feedback and comments are required and most welcome.
Thanks
SB
I have been testing a strategy for sometime (please excuse me if someone else already has posted it here) and have found that it MAY offer decent risk reward ratio.
Few things before we come to the strategy.
I am learning to be a swing trader and hence a newbie in TA. I do not understand AFL or Metastock:lol: I just use EOD charts on Chart Nexus. I am yet to do actual trades on this method.
The idea of coming up with this strategy was to take swing trades based on probable short term trends, not being glued to the PC the entire day and trying to catch the small moves, and a strategy that could be used to a wide spectrum of instruments.
Coming to the strategy:
What is Commodity Channel Index?
Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can successfully applied to indices, ETFs, stocks and other securities. In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. In this manner, CCI can be used to identify overbought and oversold levels.
The Commodity Channel Index (CCI) can be used as either a coincident or leading indicator. As a coincident indicator, surges above +100 reflect strong price action that can signal the start of an uptrend. Plunges below -100 reflect weak price action that can signal the start of a downtrend.
Strategy:
Condition:
Entry:
The 5SMA should cross the 20SMA, price should either be crossing the 20SMA or above it (for long) or below it (for short).
CCI reading > 40 (for long) or < -40 (for shorts).
All the above on daily charts. I do not use intraday charts and hence not tried on the same.
Why 5SMA and 20SMA?
5 SMA shows sentiment of traders for past week and 20 for past month.
Why CCI over/below 40 and not 100?
I have observed that by the time CCI hits 100, half of the rally is done and little is left for retail traders. You can choose to use 30 or 50 instead of 40, but 40 sees to be a stable figure and you will be able to catch the move early with some comfort.
Best Case Scenario: If you find a triangle, wedge or any other pattern with this setup then take this trade with outmost confidence.
Stop Loss: Best is to keep it at 1 ATR (Average True Range). However, you can tweak the same as per your risk appetite.
Exit: 2% on both index and stocks however you can tweak the same as per your wish.
Gapup/Gapdown: If CCI is extremely high or low (+-200 or more) then dont take the trade. Wait for the prices to find some sense and then take the trades.
Disadvantage: Whipsaws, however, with the CCI, you would avoid most of such trades. Also, if not sure then check Bollinger to see if the bands are contracting.
Thats it. Thats the entire strategy.
Anyone willing to backtest this please feel free to do so. Valuable suggestions, feedback and comments are required and most welcome.
Thanks
SB
