# All CCI Binary Options Indicator

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Contents

Despite being called the Commodity Channel Index (CCI) this indicator is not just for commodities. It can be used for all markets. The CCI is an indicator which oscillates back and forth, above and below zero. It can be used in multiple ways; here are two strategies that utilize it.

Basic CCI Strategy

The developer of the CCI, Donald Lambert, created a basic strategy for the indicator.

When the CCI moves above +100 it means the price is trending strongly, and therefore triggers a buy signal. The trade is held until the CCI drops back below +100.

When the CCI drops below -100 a strong downtrend is in place, and therefore triggers a short sell (put) signal. The short trade is help until the CCI rallies back above -100.

Entries could also be used with binary options, although some testing and monitoring of volatility would be required to estimate the ideal expiry time for various financial instruments.

Figure 1 shows this basic strategy applied to a 5-minute stock chart.

Figure 1. Apple (AAPL) 5-Minute Chart with CCI Trades

In the example above the strategy worked well, although it can be prone to triggering false signals. Therefore, there is another variation to the strategy. Some traders may prefer the simplicity of the first strategy and choose to make their own adjustments to it if they wish. Other may prefer the next strategy which is a little more complex but may provide better entry points.

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“Double Time” CCI Strategy

The double time strategy uses two timeframes; a longer time frame to establish the trend and a shorter time frame to spot pullbacks.

Figure 2 shows the same trading day in Apple, except using a 15 minute chart.

Just after the open the CCI moves above +100 and stays above it for the next several hours.

Because the CCI is above +100 on the 15-minute chart (longer time frame), that means we are only looking for long/buy entry points.

To find the entry points we use a shorter time frame, such as a 1-minute chart.

A signal occurs on the 1-minute chart when the CCI moves below -100 and then crosses back into positive territory (zero line).

Remember the main trend is up as shown by the 15 minute being above +100. We use the 1-minute chart to find pullbacks or oversold conditions in that longer-term trend. We then use those pullbacks to buy. When the CCI on the 1-minute chart moves below -100 it indicates a pullback. When the CCI (on the 1-minute chart) moves back above 0 (zero line) it indicates the pullback has ended and the trend is resuming.

Figure 3 shows the entries into the longer-term uptrend using the 1-minute chart.

The entries using this strategy do fairly well at picking low points before the trend resumes. The entries are more favorable than using the basic strategy.

Use the 1-minute chat to also exit trades. Exit a trade after it crosses above +100 on the 1-minute chart and then moves below the zero line.

Figure 4 shows the exits, marked with vertical on the price charts.

If the CCI is below -100 on the 15-minute chart, that means we would only look for shorting/put entry points.

A signal occurs on the 1-minute chart when the CCI moves above +100 and then crosses back into negative territory (zero line). Exit when the 1-minute CCI moves below -100 and the crosses back into positive territory (crosses above zero line).

Tying it Together

The strategy is not designed for precise timing, which means if you are trading binary options you will need to test out the best expiry time to use with the strategy, based on the instrument’s (stock, forex pair, commodity, etc) volatility.

I have made the rules fairly strict, in that you only take long positions if the 15-minute chart is above +100. You may wish to relax this, and take longs if the 15-minute CCI is above 0. Similarly, I originally said only take shorts if the 15 minute CCI is below -100. If you find it prudent to do so, you may take wish to trade shorts as long as the 15 minute CCI is negative.

If you are trading traditional markets the strategy doesn’t utilize a stop loss–entries and exits are all based off the indicator. This exposes a trader to potentially large losses on a quick move. Therefore it is recommended a trader employ some sort of stop loss order. For example, with longs place a stop just below a former swing low in price. For short, place a stop just below a former swing high in price.

Test out the strategy before implementing it and come up with personal guidelines on how to employ the strategy if the concept of it appeals to you.

## CCI — What Is It? How to Use Indicator in Trading

CCI (the Commodity Channel Index) first appeared in specialised literature in the late 1970’s. Donald Lambert created the CCI indicator to analyse commodity markets, but the market history has proven that if CCI “works,” it can be applied to all financial sectors. The currencies, securities and derivatives markets are impractical and overly emotional.

This is evident in the unending cycle of crises alternating with periods of economic recovery. The market reaction to these events is excessive. The ups and downs are so extreme that it sometimes leads to the collapse of individual corporations, and in rare cases, even governments. But eventually the world economy always reverts back to the average state.

## What is CCI?

Donald Lambert suggested CCI calculating the stable intervals of fluctuations in the commodity markets, and to consider any unusual deviations from these norms as a sign to enter in the opposite direction, assuming that the system will recoil from the extreme values and gravitate back to the middle.

In most cases, Lambert is right. If we set the indicator to “fast” (the CCI is displayed under the quotes chart), we can look at where the CCI line exits the “standard channel” and see that in four cases the indicator is right (1), but in the fifth case (2), the price “took off”.

In four cases the indicator is right (1), but in the fifth case (2), the price “took off”.

What is wrong in the fifth case? The problem is the type of indicator. It is an oscillator, a flat indicator that “folds” when a trend appears. As long as there are price fluctuations within a steady range, CCI detects reversals perfectly. As soon as the price of the asset gains momentum in a certain direction, false signals start.

## The CCI Formula

Let’s look at what’s under the hood in order to understand how to correctly use this indicator’s algorithm. If you start to panic when you see a mathematical formula, you can just skip to the next section. But it is useful to understand how this tool works so that you can get the most out of it. The stream of market transactions forms a candle with four price points: opening (1) and closing (2), and two extremes – the high (4) and low (3).

Donald Lambert used the average price of the extremes plus the closing price, and called it the typical price (tp):

By making this calculation for each candle in the chosen period, we can get the average values using the simple moving average SMA(tp):

The task of determining the stable price channel is solved by averaging all ranges of deviations of the typical prices from their mean Moving Average Deviation (MAD). The deviations are taken in modulo (in absolute values).

Once the problem of the channel has been solved, we just need to compare the position of the current deviation of the typical price:

relative to the established MAD. But what will serve as a benchmark for the level of “normal” deviation?

Donald Lambert chose a factor of 2/3, based on the probability density of normal distribution. We all remember the “three sigma rule.” There is a probability of 99.73% that random values lie within three deviations, and going outside 2 of them will cause correction. This is a general approach used in many indicators of this kind:

2/3 = 1/0.015, and the final CCI formula is as follows:

The levels that define the channel are taken as 100 (+100 is the upper limit and -100 is the lower limit). Just as for any oscillator, overbought and oversold levels are intrinsic to CCI. In a flat market, the price rarely leaves the channel.

## How to Use CCI Indicator – Trading Strategies

There are two basic strategies for using CCI the oscillator: crossing the +100 and -100 levels.

Buy the asset when the CCI line crosses +100:

Sell the asset when the CCI line crosses -100:

To trade in flat channels, open a deal when it crosses 100 and reverses back lower or higher than this level. The picture below shows what a CCI signal to sell looks like:

A method to buy in a flat channel looks like this: wait for the line crossing the -100 level, get ready to trade, and when it reverses and crosses the same level going up, it’s time to enter (buy the instrument).

## CCI Strategy

There are break-even, trend, and counter-trend strategies to use CCI.

Break-even strategies haven’t lost their relevance due to the well-developed “step” approach for market-makers building a position.

How does it work? Each asset has firms that specializes in this instrument and trade in it continually on both sides of the market. Thanks to market-makers, any customer can buy or sell currencies 24 hours a day and always receive the “market price” without fail. Major financial institutions use the services of market-makers. A large amount of capital should enter the market gradually, so as not to raise or lower the entry price for itself. So flat market conditions might actually represent a building position. When the news hits the market, all the traders rush to trade on “that side”, while the market maker “gives away” their previously gained position in bits, and might even set up a new one at the peak of this movement.

The market is presented as a series of flat sections of a set of positions, followed by the quotes rising to the “new level.”

A different approach insists on trading with the trend, assuming that even a bad entry that brings a loss will be “pulled out ahead” after the trend corrects.

The counter-trend strategy is most often used by scalpers, day traders with a large number of transactions (trading turbo options). By passing up the trend to avoid a chase, scalpers “catch” the correction using a counter-trend strategy.

To create a strategy, we need to have a number of primary and secondary indicators. Key indicators serve as signal “donors”. They are used for entering a trade on the asset (buy or sell). As mentioned earlier, all indicators have a certain number of false signals. When there are a lot of them, it is because an oscillator designed for trading in flat mode is used in a section with directional movement.

To filter out these signals, it would help to use a trend indicator, but this type of indicator also lies during sideways movement. So we need filters that determine whether there is a directional trend on the market or it’s flat.

CCI is ideal for creating a trading system because, as we’ve seen, the indicator’s algorithm gives entries both on a trend and on a flat. Our goal when creating a trading strategy is to select filters that detect the state of the market: flat or trend. Ideally, these additional filters would help us to include elements of counter-trend trades in our strategy.

Now that we’ve defined the concept of our strategy and set our objective with CCI as the signal donor, we can begin choosing filters for it.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

GENERAL RISK WARNING

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
87% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

## The Most Important Technical Indicators For Binary Options

Consider the following bets:

• Pay $45 to bet that the price of gold will be above$1,250 at 1:30 p.m. today. Get $100 ($55 profit) if you win, lose $45 otherwise. • Receive$81 now to bet that NASDAQ US Tech 100 index will go below $2,224 at 2 p.m. today. Keep a profit of$81 if your prediction comes true. If it does not, lose $19. • Pay$77 to win $100 if the USD-JPY forex rate goes above 78.06 at 2 p.m. today; you lose$77 if it does not.
• Gain $33 if you bet on the price of bitcoin will go below$379.5 at 3:00 p.m. today. If it doesn’t drop that much, lose $67. Welcome to binary options. All or nothing, one or zero, these securities are available on Nadex and the Chicago Board Options Exchange (CBOE). Binary options allow traders to make time-bound conditional bets on predefined values of stock indices, forex, commodities, events, and even bitcoin values. Like a standard exchange-traded option, each binary option has an option premium ($45, $81,$77, and $33 in the examples above), a pre-determined strike price ($1,250, $2,244, 78.06,$379.5), and an expiry (1:30 p.m., 2 p.m., 3 p.m. today).

The differentiator is the settlement price that remains fixed at $0 or$100, depending on the option condition being fulfilled. It keeps the net profit (or loss) fixed. The option premium also remains between $0 and$100. (Related: Guide to trading binary options)

## Calculating Probability

Since binary options are time-bound and condition-based, probability calculations play an important part in valuing these options. It all boils down to “What is the probability that the current gold price of $1,220 will move to$1,250 or above in the next four hours?“ The determining factors include:

• Volatility (how much and is it sufficient to cross the threshold/strike price?),
• The direction of the price move, and
• Timing.

Technical indicators suitable for binary options trading should incorporate the above factors. One can take a binary option position based on spotting continued momentum or trend reversal patterns. Let’s look at some of the popular binary option technical indicators:

• Wilder’s Directional Movement Indicators (DMI) Average Directional Index (ADX): Composed of three lines, namely ADX, DI+, and DI-, and their relative positions, this indicator aims to capture the strength of an already identified trend. Here is the table for interpreting the trends:

Position

Momentum

Here is an illustration, using 3M Company (MMM) stock:

Image courtesy StockCharts.com

Depending upon the identified momentum and trend strength, an appropriate buy/sell position could be taken.

• Pivot Point(in conjunction with support and resistance levels): Pivot point analysis helps determine trends and directions for any given timeframe. Because of the flexibility in timing, pivot points can be used for binary options, particularly for trading highly liquid major currencies. A good example (with calculation and graphs) is included in the article Using Pivot Points in Forex Trading.
• Commodity Channel Index (CCI): The CCI calculates the current price level of a security relative to the average price during any given timeframe. The average price level is usually the moving average. Time periods can be selected as desired, allowing the trader flexibility in choosing when a binary option expires. The CCI is useful in identifying new trends and extreme conditions of overbought/oversold securities. It is very popular among day traders for short-term trading and may be used with additional indicators such as oscillators. In the below formula “price” is the asset’s current price, “MA” is the moving average of the asset’s price, and “D” is the normal deviation from that average. High values above +100 indicate the start of a strong uptrend. Values below -100 indicate the start of a strong downtrend. The CCI is computed with the formula:
• Stochastic Oscillator: In an interview, the creator of the Stochastic Oscillator, Dr. George Lane, said “it follows the speed or the momentum of price. As a rule, the momentum changes direction before price.” This important underlying detail indicates extreme cases of overbuying and overselling, allowing reversals for bullish and bearish phases to be identified. The crossover of %K and %D values indicate trade entry signals. Although a 14-day period is standard, binary option traders can use their own desired timeframes.

%K = 1 0 0 ( C − L14 H14 − L14 ) where: C = most recent closing price L14 = low of 14 previous trading sessions H14 = highest price traded during same 14-day period \begin &\text <\%K>= 100 \left ( \frac < \text– \text > < \text– \text > \right ) \\ &\textbf \\ &\text = \text \\ &\text = \text \\ &\text = \text \\ \end ​ %K = 1 0 0 ( H14 − L14 C − L14 ​ ) where: C = most recent closing price L14 = low of 14 previous trading sessions H14 = highest price traded during same 14-day period ​

Levels above 80 indicate overbought, while those below 20 indicate oversold.

• Bollinger Bands: Bollinger bands capture an important aspect of volatility. They identify upper and lower levels as dynamically generated bands based on recent price moves of a security.

Commonly followed values are 12 for simple moving average and two for a standard deviation for top and bottom bands.

Contraction and expansion of the bands indicate reversal signals that help traders take appropriate positions in binary options. Overbought situations are indicated if the current market price (CMP) is above the top band. While overselling is indicated when the CMP is lower than the lower band.

A challenge in binary option trading is correctly predicting the sustainability of a trend over a given period. For example, a trader may take the right position for an index, predicting it would hit 1250 at the end of a five-hour period, but the level was achieved in the first two hours. Constant monitoring is needed for the rest of the three hours if the trader plans to hold the position until expiry, or a predetermined strategy should be executed (like squaring off the position) once the level is reached.

## The Bottom Line:

The technical indicators discussed above should be used for timely actions with constant monitoring. One major disadvantage with technical indicators is that the results and calculations are based on past data and can generate false signals. Traders should practice caution with detailed backtesting and thorough analysis for high-risk, high-return assets like binary options.

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