Woodie's CCI is a very popular system developed by Ken Woods. Its main logic is based on patterns that are identified on the CCI (Commodity Channel Index) indicator. In this article we will explain several of the patterns and the logic behind them.
The first pattern of the CCI is the Zero-Line Reject, and it is a method I personally find very profitable. The logic of this pattern is that the CCI touches or comes close to the zero-line (the level 0) and immediately bounces back.- Usually it is required that price stays at least 6 bars above the zero-line (for long trades) or below the zero-line (for short trades).
The logic behind this pattern lies in the formula of the CCI: The Commodity Channel Index shows us the average distance between price and the 14-period Moving Average. Therefore, a zero-line-reject is in fact showing us that price touches the moving average and bounces in the trend-direction. You can place a moving average of typical price on the chart and see it for yourself.
That's one of the most powerful patterns of the Woodie's CCI, and even if you trade that pattern only - you'll do just fine.
Another pattern is the TLB - trend line break. The idea of this pattern is to enter the trade when a trend line on the indicator chart is broken, in the direction of the breakout.
This pattern is slightly less reliable but still generates good signals. The logic behind it is that a breakout of trend line shows a change in the momentum of price, therefore a good signal to enter in the opposite direction.
There are other patterns in Woodies CCI system, such as the ghost (which is similar to Head-and-Shoulders pattern), and the HFE - Hook from Extremes.
The idea of the Hook from Extreme pattern is that the Commodity Channel Index reaches an extreme level, such as 200, -200, 300 or -300, and reverses. This is the beginning of a trend reversal therefore we can enter a counter-trend trend when the pattern occurs:
The logic behind this pattern is the overbought\oversold nature of the Commodity Channel Index. When it starts to reverse it is a sign that price is too high or too low, and begins to correct this deviation. In this moment we enter counter-trend to profit from the reversal.
The Hook from Extreme is another good pattern that generates very good signals.
In conclusion, Woodies CCI system is a very powerful system that when mastered can generate good signals in Forex, Eminis, Stocks and Commodities. If you're a beginner in trading and don't have time to learn a lot about Forex Indicators we highly recommend this system.
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