more on the CCI

By , 17 August, 2008, No Comment

source:stockcharts.com

Introduction

Calculation

There are 4 steps involved in the calculation of the CCI:

  1. Calculate the last period’s Typical Price (TP) = (H+L+C)/3 where H = high, L = low, and C = close.
  2. Calculate the 20-period Simple Moving Average of the Typical Price (SMATP).
  3. Calculate the Mean Deviation. First, calculate the absolute value of the difference between the last period’s SMATP and the typical price for each of the past 20 periods. Add all of these absolute values together and divide by 20 to find the Mean Deviation.
  4. The final step is to apply the Typical Price (TP), the Simple Moving Average of the Typical Price (SMATP), the Mean Deviation and a Constant (.015) to the following formula:
CCI = ( Typical Price – SMATP ) / ( .015 X Mean Deviation )

(Click here to download an Excel spreadsheet that contains a example of the CCI being calculated.)

Dell Inc. (DELL) CCI example chart from StockCharts.com

For scaling purposes, Lambert set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and +100. The CCI fluctuates above and below zero. The percentage of CCI values that fall between +100 and -100 will depend on the number of periods used. A shorter CCI will be more volatile with a smaller percentage of values between +100 and -100. Conversely, the more periods used to calculate the CCI, the higher the percentage of values between +100 and -100.

Lambert’s trading guidelines for the CCI focused on movements above +100 and below -100 to generate buy and sell signals. Because about 70 to 80 percent of the CCI values are between +100 and -100, a buy or sell signal will be in force only 20 to 30 percent of the time. When the CCI moves above +100, a security is considered to be entering into a strong uptrend and a buy signal is given. The position should be closed when the CCI moves back below +100. When the CCI moves below -100, the security is considered to be in a strong downtrend and a sell signal is given. The position should be closed when the CCI moves back above -100.

Since Lambert’s original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals.

  • CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when the CCI dips below -100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above -100. From overbought levels, a sell signal might be given when the CCI moved back below +100.
  • As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive divergence below -100 would increase the robustness of a signal based on a move back above -100. A negative divergence above +100 would increase the robustness of a signal based on a move back below +100.
  • Trend line breaks can be used to generate signals. Trend lines can be drawn connecting the peaks and troughs. From oversold levels, an advance above -100 and trend line breakout could be considered bullish. From overbought levels, a decline below +100 and a trend line break could be considered bearish.

Traders and investors use the CCI to help identify price reversals, price extremes and trend strength. As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment.

Example

Brooktrout, Inc. (BRKT) CCI example chart from StockCharts.com

The 20-day CCI for Brooktrout provides an example using Lambert’s guidelines. Even though a few signals are good, using crosses above and below +100/-100 resulted in plenty of whipsaws. In January, the stock broke resistance at 20, and proceeded to double in the next few weeks. The CCI moved above and below +100 several times, but the stock remained in a strong uptrend. The CCI did manage to remain above +50 for about 7 weeks (blue oval), but the whipsaws below +100 could have caused an early exit. Whipsaws do not make an indicator bad. However, traders and investors should learn to use the CCI in conjunction with other indicators and chart analysis. In addition, various time frames for the CCI should be tested, and you should test buy and sell points, as well. What works for one stock may not necessarily work for another stock. For Brooktrout, a buy point on a cross above and below +50 may have worked better.

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The CCI and the entry points to trade.

By , 15 August, 2008, No Comment

Entry and exits….today I am going to emphasize the criterion of entering long or short. If you take at the last couple of midday posts you could blow up the chart and see there is a correlation between the CCI and my entry points.

I like to enter most trades when the CCI is crossing the +100 or the -100 marks…obviously is the line is moving down through the +100 or up -100 I consider these prime trade, but the CCI moving up through the +100 or or down through the -100 can be profitable trades. But the CCI is not the only criterion that I use when deciding to enter a trade. I am also very cognizant of where the support and resistance are relative to the price. Obviously, if I had the CCI moving up through the -100 point, but I was approaching a resistance line I would be very hesitant to enter that trade. I always gauge my CCI entry positions in relation to where I am relative to both support and resistance lines. As you can see on the charts, the CCI will often “waver” around the +100 and -100 lines and if you look at the chart, you will probably notice that the price is near a resistance or support line.

So it’s a two stage process for me to decide to enter a trade. I am very interested in where the CCI is relative to the 100′s and then I confirm to enter by looking at the price relative to where the price is relative to support and resistance lines. This may sound a little unscientific, and it is, and it takes a lot of practice to be adept and spotting just what trade will be profitable. I also want to make sure that I am trading with the trend….so that would be a third consideration. So, in actuality, the trade entries are very subjective, and the market action taking place has to be in a certain configuration, or you will end up with a lot of “emotional guess” trades as oppose to well thought out trade entries. Which is not to say that I never trade against the trend, because our fractal philosophy, but definition, dictates that the market is going to change directions in a wave pattern. But knowing just when a significant move is going to occur against the trend is far harder to discern than a trade with the trend….especially if the trade meets the criteria I have just outlined.

For now I would suggest that you start plotting pivot points, support and resistance, and then look at the price relative to the CCI and the 100(both + and -) and practice spotting go trades with the trend.

As you can see on the charts I have posted, I use other indicators, along with the CCI, to further refine my trades. I will, however, reserve explanation until you are accustomed to spotting these long entries.

Remember to locate the CCI and it’s position relative to the hundreds, then correlate that position with where the price is relative to support and resistance lines.

I am aware this sounds painfully simple, but emotional trading can easily take over your strategy and you must fight to avoid participating in emotional trades. Many times I have felt that the market “must” do a certain thing (go up or down) and be disappointed in the result. Usually I have not taken a good close look at what is occurring and trade with my emotions only….the market doesn’t HAVE to do anything.

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here is a chart with pivots points marked

By , 15 August, 2008, No Comment
Pivot Points
Here you can see the pivot points from the formulas in yesterday post. Notice the price action around the pivot points. Once a price penetrates a pivot point, notice how it accelerates through it, and if falters at a pivot point, how it hangs around that point for an extended period of time.
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Pivot Points

By , 14 August, 2008, No Comment

Most of the trading during any given day is done by market makers and specialists. Markets, no matter in what they deal, exist to facilitate trade and prices continually fluctuate between supply and demand to enhance the exchange process.

The market cannot exist in a state of paralysis so traders will constantly adjust bid and ask prices to keep the exchange going. This process is a combination of a traditional auction to seek top prices and a Dutch auction to explore price bottoms.

Prices continually rotate enhancing trading. Therefore, prices of perceived value (support) and perceived over valuation (resistance) can be recognized by the volume of activity at different price levels.

Prices are moving up and as soon as they hit some imaginary resistance line they turn around and start falling until they hit the level of support.

Pivot Points are those price levels that are most likely to act as levels of support and resistance on any given trading day and you can calculate them with the following formula:

H = Previous Day’s High
L = Previous Day’s Low
C = Previous Day’s Close
Pivot Point PP = (H + L + C)/3
First Area of Resistance = R1 = 2PP – L
First Area of Support = S1 = 2PP – H
Second Area of Resistance = R2 = PP + H – L
Second Area of Support = S2 = PP – H + L

When the prices move through any known pivot points (PP, S1, S2, R1, R2) on increased volume, they are most likely to continue the current trend, and if the prices hit the known pivot point but are unable to move through, then they are most likely to reverse the current trend.

Pivot points are areas to be aware of and respect. They are both dangerous and positions of opportunity.

Knowing those points can help the trader to identify potential entry points and/or stop loss levelsst of the trading during any given day is done by market makers and specialists. Markets, no matter in what they deal, exist to facilitate trade and prices continually fluctuate between supply and demand to enhance the exchange process.

The market cannot exist in a state of paralysis so traders will constantly adjust bid and ask prices to keep the exchange going. This process is a combination of a traditional auction to seek top prices and a Dutch auction to explore price bottoms.

Prices continually rotate enhancing trading. Therefore, prices of perceived value (support) and perceived over valuation (resistance) can be recognized by the volume of activity at different price levels.

Prices are moving up and as soon as they hit some imaginary resistance line they turn around and start falling until they hit the level of support.

Pivot Points are those price levels that are most likely to act as levels of support and resistance on any given trading day and you can calculate them with the following formula:

H = Previous Day’s High
L = Previous Day’s Low
C = Previous Day’s Close
Pivot Point PP = (H + L + C)/3
First Area of Resistance = R1 = 2PP – L
First Area of Support = S1 = 2PP – H
Second Area of Resistance = R2 = PP + H – L
Second Area of Support = S2 = PP – H + L

When the prices move through any known pivot points (PP, S1, S2, R1, R2) on increased volume, they are most likely to continue the current trend, and if the prices hit the known pivot point but are unable to move through, then they are most likely to reverse the current trend.

Pivot points are areas to be aware of and respect. They are both dangerous and positions of opportunity. Knowing those points can help the trader to identify potential entry points and/or stop loss levels

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midday futures contract report ESU8 8-12-08

By , 12 August, 2008, No Comment
ESU8 8-12-08 click chart to enlarge
Once again, I didn’t trade the pre-opening market and had a Dr.’s appointment at 8:30, so I didn’t get in front of my computer until nearly 9:30. I made several trades early on, and was up 2.5 points until I opted for a TRADE AGAINST THE TREND. Several posts ago, I stated I have a strong disinclination for trading against the trend, and I should have taken some of my own medicine. The trade was disastrous, and I stopped out at 12 ticks. Of course, I could have jumped out of the contract at any time until I reached the stop, but I was absolutely convinced I had found the counter trend trade that would be a real whopper. So, lets see… how many of my rules have I broken?

1. I traded against the trend.
2. As the trade went against me, I rode it into the stops
3. I developed an emotional attachment to my trade.
4. I failed to reduce the number of contracts, as you should do in a counter trend trade.

Yep, I broke all of my rules and I was convinced I was right as I traded…as a matter of fact, I cursed the screen because IT didn’t do what I wanted it to do. And I paid dearly for my inept trading behavior. I am amazed that every now and then I make the same mistakes that I rail against. So, for the day -.5 pts@5 contracts. The Fractal Trader is pissed.

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midday report -futures trading 08-11-08

By , 11 August, 2008, No Comment
ESU8 08-11-08

I did not trade the pre market today, instead I started at 8:30am on the S and P 500 e-mini. As you can see from the chart it was a day where the market rose slowly, and turned south just before noon. It was a futures traders dream, really…except that the market really didn’t exactly rise a lot…but for what was offered, it rewarded the trader handsomely. I took a long position as the market coasted down toward R2 (resistance level 2) and was confident the market would turn when it reached at or near r2, which it did. I several oscillators moving from short to long, and there had been a lot of action around R2. I entered at 1295.00 and stayed in most of the morning….or at least until the market reached 1306.5. 11pts@10 contracts. It was the only trade I made.
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Some trading rules….

By , 10 August, 2008, No Comment

I am a scalper, so I am not terribly interested in long term trends, Elliot Wave theory or any market trading technique that requires me to think ahead much more than one half day. That is to say that I am trying to carve out 2 pts. or more out of intraday directional movement. I truly believe that the market is random, so when I use the word “trend” I am not using in the sense that a technical trader would. The truth is, I use the “trend” for lack of a better word to describe intraday directional movement.

Since the market moves in many random ways, my trading method only seeks to take advantage of a tendency for people “hop on the bandwagon”. People will generally watch the market and jump into a trade when they see it heading one way or the other, and they generally stay in the trade too long. People tend develop strong emotional ties to a trade they make. They get into the mindset that the market “ought” to do something based upon some information they have gleaned, or some event that has occurred or is occurring. From the onset, let me say that the market does not “have” to do anything and freeing yourself from this mindset will greatly improve your trading. The markets are not rational, and you will drive yourself crazy trying to rationalize the movement you see unfolding on your chart.

Since I believe that the market moves randomly via fractals, or fractal movement, I do not believe that identifiable patterns form. This always gets my technically oriented friends in a ruffle, and I am often cursed for this belief. An overwhelming amount of evidence has been collected by academics to prove that the market is random that it is difficult for me to fathom that some people trade with chart patterns. By chart patterns I am talking about the species of technical formations typified by “head and shoulders patterns, pennants, double tops, double bottoms, etc” In short, I do not use any chart patterns in my trading.

On the other end of the spectrum, I do not have any use for fundamental trading either. For scalping, it should be self evident that we do not use fundamental principles. If they actually worked, most fundamentals take at an intermediate period of time to develop. My trades are anywhere from 1 minute to 30 minutes….I have been in very few trades longer than thirty minutes. But I’ll go a step further on this topic and offend all the disciples of Ben Graham and Modern Portfolio Theory….I think it’s about as valid to use as chart formations. Note to self: Is the screaming and yelling I am hearing from the back of the room? Are they throwing things at me yet?

My thesis for rejecting Modern Portfolio Theory is really simple: just because a company is well run, has products of high quality, and a healthy cash flow does not mean that the stock price will go up…just look at Cisco for the five years before it’s big move last year. Here was a company that was doing everything right but the stock price stayed pegged at around $20 for years, and there are countless examples of this being true. So I don’t use P/E ratios, beta coefficients, alpha coefficients and all the other investment terms that go hand in hand with this style of investing.

No, what I like are little spurts of unpredictable momentum. Other than fractal theory, there is no viable explanation for the gentle (and sometimes violent) rocking pattern that is part of every chart. Of course, the problem has always been ascertaining when these little bursts of momentum take place. How can you time your entry and exit points to take advantage of rocking (or swaying) that is on every chart? How do you know which sway is going to be 5 pts and which one will be a sideways move?

I have taken the liberty of drawing a dark line so you can see the swaying action in the market, and you will notice that some market moves are very short and some are very long. How do we get into the market for the long moves, and stay out of the short moves?

So…..now that I have offended every modern day investment theory out there…lets talk some about what I DO…INSTEAD OF DWELLING ON WHAT I DON’T DO.

There are many things I keep in mind when I trade, but I have 4 rules that I never deviate from. Some of these rules were hammered into my head by my mentor nearly 20 years ago, others were learned the hard way- through experience.

1. Never trade without stops in place. I can’t imagine a trader trading without a stop order in place, and am amazed when I talk with other traders at how many trade without placing stops. I suppose you might try to justify trading without stops by saying that you are sitting right there at the computer and will be able to trade out of any position before you can get in trouble. This is not true….without stops you have no way to account for the lightening fast moves that can come about from catastrophic news…The ES contract moved 71 pts in one 1 minute bar after one of the last rate cut announcements. Granted, you can have a move gap through one of your stops, but this is so rare as to have only happened to me once. Even on the 71 point move I was able to exit with a stop executed. Without stops you are taking excessive risk. Also, the stop is also a mental stop. As I have said, traders can become emotionally attached to their positions and the stop serves to remind them that they are getting out of the market whether they like it or not.

2. Never let a winning trade become a losing trade...this is one of the most difficult things to learn. When do you pull the trigger to exit? Of course, there are many oscillators that can give you a pretty good idea when the trade is over….but I have watched trader after trader get 3 points up and become convinced that market is going through the roof. It seldom does, and what generally happens is the trader rides the trade right back down to breakeven or a losing position. We will talk at length about how to avoid this….but exit strategy is seldom easy. And for those of you wondering, I can’t stand trailing stops.

3. Avoid trading against the trend…but if you must, cut the number of contracts you normally trade in half. I chant “the trend is my friend” twenty times before going to bed every night. And I still make bad trades, almost always against the trend. How do you know what the intermediate and short term trends are? I make it easy, I chart an 89 period Simple Moving Average and when the price is above the moving average I concentrate on long trades, and conversely, when it is below the 89 period average I concentrate on short trades…this silly little rule will save you money.

4. Be on the right side of the trade…have you ever done this? You have considered a trade carefully after watching it set up exactly the way you dream of. Everything is perfect, except the trade skitters sharply the wrong way when you execute. Most traders will watch the price crash into their stops and chalk it up to experience. You don’t have to be stopped out on every losing trade. If the darn thing looks like a dog out of the gate, and your oscillators even confirm this, get out….I’ll say it again, you don’t have to ride every trade into your stops. It takes a tremendous amount of ego reduction to do this….you have to admit to yourself that you were dead wrong from the onset and take a smaller loss than hitting your stops. It not as easy as it sounds.

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Sunday blurbs…

By , 10 August, 2008, No Comment

I’m not an overly political person, and find more humor in politics than anything. I suppose I prefer to laugh than cry. What else can you do with this rabble of hooligans we call the US Congress? Then again, they are men WE elected, we voted into office.

But let me ask you this….With the problems we are currently experiencing in the United States, does the next president have even a remote chance of success? I can’t imagine anyone could want to step into the problems the US is experiencing right now…in the best of times the job is a meat grinder…but now?

I live in downstate Illinois and it’s very flat and windy here. I’m sure there isn’t a person in the US that hasn’t found themselves engaged in debate about the cost of energy. Whether it is energy problems related to global warming, or the high price of oil…energy is center stage in much of what the media is discussing.

So with the topography of Central Illinois, you would think our landscape would be dotted with energy producing wind machines. That is not the case…..even though the footprint for one of the windmills is very small, they are apparently displeasing to the eye, which is to say that when one farmer signs on with an energy firm to have a wind machine built, the farmer’s neighbors quickly file legal briefs to prevent the construction, claiming the machines ruin the landscape view.

But let me ask you this….if your neighbor decided he wanted a wind machine in the backyard, how would you feel about it?

Both McCain and Obama have promised another stimulus package. I absolutely loved the last stimulus package where they sent me a check for $800. What is really funny is that no one saw that as a bribe to shut up….seriously, did you actually believe that the stimulus package was a cure for a trillion dollar credit default problem. But darn it, supply and demand has finally caught up with oil, read about it here. I just hate it when reality screws up stupid political ideas.

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