Description: Both the Relative Strength Index (RSI) and Commodity Channel Index (CCI) are two of the most popular momentum indicators used by traders. While they can be used on their own for creating trading strategies, combining them together can bolster their effectiveness further resulting in a powerful RSI, CCI combination trading strategy that can yield phenomenal trading results.
However, to do so we will need to tweak the default settings of both the RSI and CCI indicators.
Firstly, we will use a 30-period RSI in place of the default 14-period RSI. This will make the indicator less sensitive to short term price fluctuations. Additionally, we will add a 50 line to the indicator along with the default 70, 30 overbought and oversold thresholds that will help us to gauge the intermediate term trend in the market (be it uptrend, downtrend or sideways).
Secondly, we will use a 6-period CCI in place of the standard 20-period CCI. This is done to make the indicator more sensitive to the price fluctuations for better signal generation. The overbought and oversold threshold limits of +100 and -100 respectively remain the same.
This RSI, CCI trading strategy is meant to be used on the daily time frame.
Let’s now dig into the trade setups generated by the RSI, CCI combination trading strategy.
When the 30-period RSI is above the 50 line, it indicates that the underlying upward momentum in the stock is strong. We will consider trading only from the long side. For signal generation, we will turn to our 6-period CCI and look for -100 crossovers from below. For taking profits, one can wait for the 30-period RSI to cross below the 50 line from above.
When the 30-period RSI is below the 50 line, it indicates that the underlying downward momentum in the stock is strong. We will consider trading only from the short side. For signal generation, we will turn to our 6-period CCI and look for +100 crossovers from above. For taking profits, one can wait for the 30-period RSI to cross above the 50 line from below.
Although this RSI, CCI trading strategy is a very powerful way to trade the markets, there are some more advanced trading techniques as well.