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the interpretation and application of price action concepts

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We all share a similar path in Trading. Even though you may not be a consistently profitable trader now, you can chose to enjoy the path. This alone may make the difference in your success.

 

 

How to see the market context using CCI

Written by Buzz 1 of 5

2  3  4  5 



Towards the end of September 2003, I decided to stop trading the S&P e-mini for a while and focus on the Russell 2000 e-mini. The swings seemed to be smoother and someone said that there is not as much "monkey business" in this market as has developed in the S&P. There also appeared to be twice the dollar range as compared to the S&P. With that said, if the market really trended better, provided twice the earnings potential and also allowed me to set smaller stops, I could not see the downside to trying this market.


Since I started to look at the CCI methods as taught by Woodie and many people in his site, I have come to appreciate how simple the CCI can be once you understand it. Many people have became so good at using the CCI method, they are able to just use the CCI indicators without showing price bars on their screen, and trade very profitable as a result. Their reasoning is that the CCI tells you everything you need to know. It is often one (1) price bar ahead of the actual signal provided by the price bar, and you do not get faked out by the minute price flicker that can be seen on some trading platforms. So in reality, these people have evolved into traders that can easily gauge the normal ebb and flow of the market. They have developed patience while trading and will reflexively react when a valid entry signal is given. They enter each trade with an open mind, knowing that their entry is based on probabilities and that they could get stopped out for a small predefined loss. If that happens, their loss was defined ahead of time and is not a reflection on them as a trader, but just a normal event that will happen everyday. But they are not concerned by these small losses because at the end of each day, their winnings are always greater than their losses and they have peace because they know that they traded their plan. This allows them to come back the next day with renewed excitement about trading and allows them to keep sharing what they have learned with others, so that more traders on the retail side, can make money.


When I first came to Woodies CCI Club on Based on some general comments made Woodie and other traders in Woodies CCI Club, I came up with my own spin on how to trade using parts of their message. I have no idea if they are the originators of these ideas, or even if they still use them today. But I will say again, that the end result of this document is a direct result of Woodie and those members of his room who shared some of their knowledge freely with others. My purpose is not to alter anything that Woodie or the other great traders say or do. My purpose is to give people new to the room a way that they can look at the larger market and have a better idea of a least which way the trend is going. To be able to measure the strength of the trend and to point out possible areas where to look for entries. The way I interpret the information on my screen allows me to see the market and to use the 14 CCI for my triggers with confidence. Now I am able to clearly see the ZLR (zero line rejects) and the TLBs (trend line breaks), Ghost and Shamu patterns and then act on them. I am even able to look at just my CCI indicators without the benefit of price bars, and to imagine very close what the price bars were actually doing. Was the price testing the 34 EMA, crossing the 34 EMA, or showing a change in trend. When you can get to this last step, you have come a long way to understanding the market context better. If after you have read this and it has had a positive impact on your trading, then I would ask that you send a periodic cash contribution to the Make a Wish Foundation, or other charities or church organizations as an expression of your gratitude. For me, I have set this as a personal goal. In so doing, it has given my trading new meaning knowing that others will also benefit from any gain I am able to achieve.


Thank you in advance,
"Buzz"


The vast majority of traders would say that they prefer to trade with the trend. Most people would agree that there is nothing better than to enter a trade with multiple contracts in the early stage of a strong trend and then methodically scale out of your trade as it progresses. Once this is done and you have some nice profits to show for the day, you can seek to enter the trend a 2nd time, but this time hold your entire position longer and increase your profits for the day. But it is also safe to say that the majority of us have traded against the trend. Sometimes thinking we were trading with the trend, only to get stopped quickly as a result. Many of us are also guilty of trying to pick the top or bottom of a swing move, only to again get stopped out quickly for our mis-guided efforts. Maybe this is because people are too concerned with the popular adage that you need to "buy low and sell high" or "sell high and buy low". Trying to pick these turning points is very hard and has ruined many traders. In my opinion, a smarter approach would be to buy near the bottom of an uptrend and sell the contracts back later at a higher price. I can not be concerned with picking the exact bottom or the exact top. I am content with just taking a good chunk out of the middle. The same is true for short trades. If the market is going down and you sell into it, and then the market falls another 75%, why not be happy with the large chunk of profit you were able to get and not worry about how the small amount you left on the table.


I use three sections on my main trigger screen. In the top section, I use normal candle stick price bars and two EMA's. The red dots represent a 34 period EMA line and the blue dots represent a 20 period EMA line. The middle section of my screen has a 50 period CCI indicator in use. The bottom portion of my screen has a normal Woodie CCI set up of two CCI indicators that overlay each other. The length of the black line is 14 and the red line is the 6 period turbo. I use a combination of data from E-signal and charting software from Ensign. I will show you the set up screens for each of these indicators at the end of this document. For those who use other software platforms, you might need to play with the settings if your charts do not match mine exactly.


Basic Function of 20 and 34 EMA dots
The slope and color of the dual EMA lines will set the immediate trend. The 34 EMA line is shown as red dots and the 20 period EMA is blue dots. If the red dots are on top of the blue dots and both sets of dots are sloping downward, then this is a down trend. You will focus your trading attention on short trades. I do not use these EMA lines by themselves to identify the trend. I also use a 50 period CCI.


Basic function of 50 CCI
The way I use the 50 CCI is for a trend indicator. The CCI has a zero line and Woodie has pointed out that this is where the support and resistance is for that index fund. When the 50 period CCI is above the zero and it looks like it is flat or rising, I will only look for long triggers. The opposite is true when it is below the zero line, there I will only look for short triggers. If this line is just hanging around the zero line I will sit out. I do not use the 50 CCI by itself to identify the trend. I use it along the 20 and 34 period EMA.


The key is to look at both the 50 CCI and the EMA dots when you determine which way you think the trend is moving and how strong it appears to be. For now just follow along and study the examples that I have included here. After you have read through this a few times, then you can set up your own charts and look at some historical data on your computer and then watch a live trading session and see if your understanding is better. I would also like to point out that this is not an absolute science; it is more like an art form. It is not like saying 1+1=2. There will be times when the indicators will give you a buy or sell signal and they will fail. You will lose money. Other times they will give you a buy or sell signal and you may elect to stay out of the market and it will do exactly what it should do and you will still lose some money. Not in the actual cash sense, but you will know that you could have easily made some money on the last signal and you did not. Oh well this is what trading is all about.


For now, we need to look at some examples and get a deeper understanding on how to view market context by using some simple indicators. I will present this one step at a time and then build upon the previous example by adding one more element for you to consider.

 

 

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