By Wendy Kirkland
Traders who are just starting to learn about option trading often ask if there is just one simple indicator on a chart that can help them see an equity’s direction while they are just starting to learn the trading process. The answer is “Yes” and today I will share information about that indicator.
Channel Commodity Index (CCI) is an indicator that shows whether an equity is overbought or oversold and ready to shift directions. It is an easy indicator to read.
- The CCI is a technical indicator that measures the difference between the current price and the historical average price.
- When the CCI is above zero, it indicates the price is above the historic average. Conversely when the CCI is below zero, the price is below the historic average.
- The CCI is an unbounded oscillator, meaning it can go higher or lower indefinitely. For this reason, overbought and oversold levels are typically determined for each individual asset by looking at historical extreme CCI levels where the price reversed from.
To take this further, let me explain the marked levels on the indicator. The zero line separates bullish (above zero) and bearish (below zero) territory. When the line rises and crosses the 100 line it is sharing that the equity is now overbought. It can then create what I call a “fin”, like a dolphin or shark fin on the upper level of the chart. As the right side of the fin is created, it is suggesting price is as high as it is going to go for the moment and a drop back below the 100 line suggests temporary weakening from the strength it had. As long as it stays above the zero line, it remains bullish until it crosses back below the zero line.
When the line drops and crosses below the zero line, it is sharing that the equity is now bearish. Then, when it drops below the -100, it is now said to be oversold. It then often creates what I call a “fin”, like a dolphin or shark fin on the lower level of the indicator. As the right side of the fin is created, it is suggesting price is as low as it is going to go for the moment and a rise back above the -100 line suggests temporary strengthening from the dropping strength it had. As long as it stays below the zero line, it remains bearish until it crosses back above the zero line.
This indicator makes it easy for new traders to look at a chart to see where price has been, if it is gaining or losing strength now, and what is likely to happen next.
Once you grasp how the CCI indicator works, the next step is to learn how to quickly analyze a chart to determine what direction price is apt to move next. I am going to share the image of a chart for the Ford (F).
Now imagine if you learned how to read the CCI indicator, you decided to enter a Call trade on January 2nd when the CCI indicator rose above the -100 line and got out when it dropped back below zero on the January 17th, and then got in again when it rose back above zero on the 23rd, exiting when it created the upper Fin the first week in February. It is possible to ride the indicator up and down. Periodically, there are periods of indecision within an equity, and then that is when you step aside and find an equity that be trading more decisively.
My goal is to teach everyday people how to trade options, to learn to read charts, and while they are learning, they can participate in a program like ALPHA that trades the daily charts like the chart above. I think of this as an earn-while-you-learn program that is perfectly suited for people who are interested in learning to trade options as well as have the opportunity to earn a profit as part of the learning process. If you are interested in discussing this further, please contact FFR Trading today!