Woodies CCI is a complex technical analysis indicator developed and introduced to the trading community by Ken Wood. What’s its most distinctive feature? Woodies CCI looks and feels more like a complete trading system rather than a standalone indicator. It can, therefore, be used on its own (unlike simpler indicators that require confirmation from other technical analysis tools). Read the full article to learn how to set up and use Woodies CCI in trading.
How does it work?
When we say that Woodies CCI is a trading system of its own, we mean that it effectively incorporates several different indicators and metrics. Woodies CCI is a combination of 5 basic elements: the CCI, the CCI Turbo, the CCI Histogram, the base line and support/resistance lines.
The CCI and the CCI Turbo are the red and the green lines respectively. The CCI Turbo is a regular CCI with a shorter period. As you probably already know, Commodity Channel Index is an oscillator-type indicator that measures the difference between the security’s price change and its average price. Asset prices are well above average when the indicator is up, asset prices are well below average when the indicator is down. The CCI is the most important part of this trading setup.
The CCI Histogram is the second part of this trading system. It behaves according to the following rules: when the trend is positive the histogram is above the zero line, when the trend is negative it is below the zero line. The color of the histogram bars is determined by the previous performance of the CCI. When the indicator stays above the zero line for 6 bars and longer, the following bar turns green. When the indicator stays below the zero line for 6 bars and longer, the following bar turns red.
Oversold and overbought levels, that are by default set at ± 100, can be adjusted in the settings menu. The baseline is at zero.
The combination of all these factors can be interpreted as a bullish/bearish signal.
How to use it in trading?
Now, to the most interesting part. What kind of signals this indicator/trading system is capable of sending and, most importantly, what kinds of signals are you looking for?
There are several signals that traders are usually looking for when working with this indicator.
1) Zero-line Reject
The zero line is an important threshold that separates a negative trend from a positive one. It is used to receive one of the most popular Woodies CCI signals. When the CCI gets close to the zero line during a strong trend and then bounces off in the opposite direction, a new trend is considered to be established. Consider making an entry based on the prevailing trend direction.
2) Reverse Divergence
When there are peaks and troughs on the CCI that all can be connected by a straight line, and the straight line is pointing at zero, a strong trend in the direction of the straight line can be expected.
3) Horizontal Trend Line Break
When two CCI peaks or troughs are located on the exact same level around the +/-100 threshold, a new deal might be considered. This signal is tricky to use, as it can be both in the direction of the prevailing trend and against it. However, it is still good to keep an eye on this pattern.
With a complex trading system like this, you will definitely need some time and practice to use it properly. Don’t let this stop, however, as it is always beneficial to learn something new in trading. What may sound intimidating in the very beginning gets clearer and more logical once you grasp the basic principles of trading with Woodies CCI.
Note that Ken Wood was against the use of take-profit orders but relied heavily on stop-loss orders.
How to set up?
Setting up the indicator is easy. In order to do so, click on the ‘Indicators’ button in the bottom-left corner of the screen and then find Woodies CCI in the ‘Momentum’ tab.
In the menu that appears you can adjust numerical and visual settings of the Woodies CC: the color of each element, CCI periods, support and resistance levels, as well as the source price. Some traders use the indicator with standard parameters, while others adjust the settings to their personal needs. So it is totally up to you.
Now, when you know how to use Woodies CCI in trading, you can proceed to the platform and give this indicator a try.