May 27, 2009
CCI Divergence Trading - A Simple System You Can Use
Today I want to share with you a very simple trading system that is based entirely on CCI divergence. CCI is a pretty useful indicator in itself but it's even more effective when you trade divergence patterns.
In trading circles divergence is basically where the price makes new highs but the indicator in question, ie the CCI in this case, fails to make new highs. Similarly in a downward trend the price is making new lows but the indicator is failing to make new lows.
These divergence patterns indicate that a reversal is about to take place because the trend is starting to run out of momentum, and they are generally very strong signals.
So getting back to the CCI divergence trading system, I recommend you plot the price chart along with two CCI indicators - the CCI (10) and CCI (60). You may like to try other settings but I find these work extremely well.
Then you want to wait for a divergence pattern to emerge on BOTH of these indicators. You can use just one indicator but I recommend using both of them if you want to identify the very best signals.
To give you an example there was an excellent set-up on the GBP/USD pair yesterday morning (on the 15 minute chart). You can see from the chart below that although the price didn't actually trade lower, it did form a perfect double bottom formation (indicated by the grey vertical line), and yet when it did so both the CCI indicators failed to make new lows, which was a very positive sign that a reversal was about to take place, and which turned out to be correct in this case.
As with all trading systems this simple CCI divergence system isn't foolproof but it can provide you with some excellent signals on occasions.