› CCI Trading Strategy for Binary Options - How That Works

CCI Trading Strategy for Binary Options - How That Works

Commodity Channel Index is an oscillator based on measuring the momentum of a trend. It was initially developed to trade on Commodities. However, CCI indicator showed profitable performance, and effectiveness of its trading signals made the indicator popular to use in other types of trading in the financial markets including binary options. The oscillator shows overbought and oversold conditions of an underlying asset price, indicates phases of a trend and shows periods when the current trend is getting exhausted.
Binary options trading strategy based on CCI is flexible as it can be effectively applied for both trending market conditions and range bound choppy price action. Several technical indicators can be added to CCI strategy in order to increase efficiency, cut unnecessary noise and fit requirements for an individual trading algorithm. The method is suitable for trading on any asset class including currencies, commodities, stocks and cryptos. Thanks to the universal mathematical formula, CCI works well on any timeframe so traders can choose any expiration time of binary options.

What is the Commodity Channel Index?


Commodity Channel Index shows the market momentum. In contrast to other types of widely-used oscillators such as Relative Strength Index or Williams %R, CCI does not have fixed ranges. That feature allows the indicator to point to strong trends with extreme values of the wave range and compare the power of possible retracements. Other conditions are the same. CCI has adjustable oversold (positive value) and overbought (negative value) levels and the middle line at zero, which divides bullish and bearish phases of the asset quotations.

CCI chart may have divergences, patterns based on the difference of the price action compared to the indicator’s performance. These patterns usually indicate periods when a trend is getting weaker and the likelihood of reversal gets higher.

How does CCI look like?


The indicator is placed under the price chart in a separate window and looks like this:

CCI Trading Strategy for Binary Options - How That Works

CCI settings


Default CCI settings are as follows:

  1. Period - 20 bars (days or hours depending on the chosen timeframe of the price chart);
  2. Overbought level: +100. Traders can set +120 as the overbought level to lower the indicator’s sensitivity or +80 to increase the number of trading signals ;
  3. Oversold level: -100. It can be shifted to -120 if traders prefer lowering the threshold or to -80 to have more frequent entries;
  4. Source - close price. The CCI calculation can be applied to open, high or low rates.

The essential parameter in CCI settings is the period as it takes into account close rates for all of the previous candlestick or bars. In most cases, it’s recommended to leave the period unchanged as it was designed especially to balance the relation of short- and long-term analysis. However, different approaches to trading algorithms based on expiration time might require a longer or shorter period of the CCI indicator. For example, binary options traders looking for long-term investment could take benefit of the period 34 bars on the daily timeframe, while short-term scalpers might get more frequent entries thanks to a lowe period of 13 bars on the 15-minute chart.

Mathematical formula


Commodity Channel Index formula has several intermediate variables to be calculated separately. First, there is such a term as the Typical Price, which consists of a sum of high, low and close prices divided by three. The formula adds all of the typical prices for every bar in the chosen period, which implies additional smoothing. Second, Mean Deviation is the mean of the difference between the Typical Price and Moving average divided by the number of bars in the period. The deviation in the formula plays a role of volatility indicator, which helps CCI to reflect strong trends.

The CCI formula is as follows:

CCI = (Typical Price - MA) / (0.015 * Mean Deviation)

Where:
Typical Price = Sum{1 to P} ((High + Low + Close) / 3),
P = number of periods,
MA = Moving Average of the Typical Price,
Mean Deviation = Sum{1 to P} (|Typical Price - MA|) / p,

CCI patterns and trading signals


CCI patterns and trading signals can be divided depending on the price action they describe. Continuation patterns confirm the current trend direction, while reversal patterns are supposed to show a counter-trend reversal. Let’s have a closer look at some of them.

CCI continuation patterns


When a downtrend had bottomed out and asset price bounces off a certain support level, pointing to strong demand for call options at that level, CCI starts to come off the oversold territory. In case if the indicator’s line crosses the threshold of zero, which divides the bearish and bullish phase of the trend, then the oscillator shows a potential continuation of the upswing. Therefore, this signal can be used by binary options traders to start the trading cycle of buying call options more aggressively, including larger volume and shorter expiry. The bearish continuation pattern is the same but mirrored. CCI has to cross the zero line after peaking around the overbought level in order to confirm the reversal of the trend. In this case, put options are getting more attractive.

CCI reversal patterns


The key line to monitor possible reversals is overbought or oversold level. In case if CCI bounces off it, charting a sharp whipsaw, then the change of the market sentiment is highly possible. Another case happens when CCI enters the overbought or oversold level during a strong trend but gets back out of the zone after some time. The moment when CCI crosses the overbought threshold from above or oversold line from below is considered as an entry signal.

There are also reversal patterns based on so-called divergences. Imagine an uptrend, which is getting exhausted at some level. The bulls are trying to push the price higher, but they face strong resistance from put-option buyers. As a result, the volatility is getting lower, the range of candlesticks is squeezed. The price chart keeps drawing higher highs, but CCI reflects the action by lower highs. This pattern is called a bearish divergence and it indicates a possible reversal of the recent uptrend.

How to use the Commodity Channel Index in binary options trading?


CCI strategy is simple and profitable. However, rules and conditions have to be executed thoroughly, while traders should keep in mind risk management rules. Here is the list of conditions for binary options trading cycles according to the trading system:

Conditions to buy Call options on the oversold level


  • If a downtrend was pushing the indicator’s line toward the oversold territory, but the crossover of the threshold did not happen and CCI bounced back up, then traders should start buying call options.;
  • The trading cycle has to be continued in case if the oscillator crosses the zero line from below;
  • If CCI tested zero value but failed to breach it, traders should stop the cycle of buying call options;
  • If the upside swing continues, traders should keep buying call options until the CCI indicator reached the overbought level.

Conditions to buy Call options on the oversold territory


  • If CCI stayed at the oversold territory during a downtrend, while the asset prices had bottomed out and started reversing, the moment when oscillator’s line crosses the oversold line from below is considered as the trading signal to start buying call options;
  • Continue the trading cycle in the same direction until CCI charted an opposite reversal signal or bounced off any of the resistance levels such as zero line or overbought level.

Conditions to buy Call options on the level of 0 from below


  • After a downtrend reversed and an asset price had found a bottom, CCI should start edging higher from the oversold or bearish territory;
  • If CCI breaks above 0, start buying call options;
  • Keep the trading cycle if the asset price is heading into the right direction and CCI is charting higher highs;
  • Continue the trading cycle until CCI reached the overbought territory or bounced off it;
  • If CCI bounces back below 0, stop buying call options.

Conditions to buy Put options on the overbought level


  • If an uptrend was lifting the indicator’s line toward the overbought territory, but the crossover of the threshold did not happen and CCI bounced back down, then traders should start buying put options;
  • The trading cycle has to be continued in case if the oscillator crosses the zero line from above;
  • If CCI tested zero value but failed to breach it, traders should stop the cycle of buying put options;
  • If the downside swing continues, traders should keep buying put options until the CCI indicator reached the oversold level.

Conditions to buy Put options on the oversold territory


  • If CCI stayed at the overbought territory during an uptrend, while the asset prices had peaked and started reversing, the moment when oscillator’s line crosses the overbought line from above is considered as the trading signal to start buying put options;
  • Continue the trading cycle in the same direction until CCI charted an opposite reversal signal or bounced off any of the support levels such as zero line or oversold level.

Conditions to buy Put options on the level of 0 from above


  • After an uptrend reversed and an asset price had found a top, CCI should start edging lower from the overbought or bullish territory;
  • If RSI breaks below 0, start buying put options;
  • Keep the trading cycle if the asset price is heading into the right direction and CCI is charting lower lows;
  • Continue the trading cycle until CCI reached the oversold territory or bounced off it;
  • If CCI bounces back above 0, stop buying put options.

Examples of a trading strategy based on the Commodity Channel Index


Buying Call options on a bounce from the oversold level:

CCI Trading Strategy for Binary Options - How That Works

Buying Put options on CCI coming out of the overbought zone:

CCI Trading Strategy for Binary Options - How That Works

Buying Call options with a bullish divergence on CCI:

CCI Trading Strategy for Binary Options - How That Works

Buying Put options on a breakout of the CCI middle line from above:

CCI Trading Strategy for Binary Options - How That Works

If you like this strategy, you might also be interested in this Donchian Channel Indicator

Additional indicators for the strategy based on CCI


As far as CCI is an oscillator with quite a sensitive formula, it reflects almost every wave of the price. Several trading approaches are based on a lower number of entries and additional filtering of the market noise. This requires adding a technical indicator with a different formula in order to increase the efficiency of the trading system. Trend indicators are the most suitable ones for this case. MACD, ADX and Ichimoku Cloud are the most popular among them. The main idea for such a combination of indicators is that the signal coming from CCI has to be double-checked and confirmed by the trend indicator. If, for example, MACD has a negative histogram in a moment when CCI bounced off the oversold zone, the signal is ignored.

Another way of filtering false signals is to add a set of simple moving averages with different periods together with an envelope channel indicator. This combination shows several levels of technical support and resistance on the price chart, and when the CCI overbought/oversold level is reached at the same time with a test of resistance/support, the trading signal is more reliable. For instance, binary options traders could consider using CCI together with a simple moving average with the period 89 bars, exponential moving average with the period of 21 bar and Bollinger Bands indicator with the period of 21 bar. A demo-account backtest of any trading strategy would help increase its efficiency and maximize profitability before using it on the real-money account.


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