CCI - BASIC PATTERNS AND TERMINOLOGY By James L. O'Connell

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BASIC PATTERNS AND TERMINOLOGY By James L. O'Connell

First I would like to thank Jim O'Connell of PFG (Peregrine Financial Group and
Peregrine Charities) for reworking this document. This was needed very badly as
the original needed to be updated. Jim spent many hours and hard work putting
together the correct info and CCI documentation so that traders worldwide would
have something to help them in there trading careers and learning CCI. Jim has
gone past "traders helping traders" excellent work, and hope all who read it and
learn CCI will be successful and thank Jim…JIM WELL DONE

Woodie

We hope that after reading this text, you will get the basic idea of Woodies CCI system,
an ability to recognize his entry and corresponding exit patterns. This will also serve as a
reference for all of the vocabulary used in Woodie's community of traders, so you will be
able to ask questions and understand the lingo throughout the trading rooms.
www.woodiescciclub.com

Woodies goal is "Traders helping traders". It is my hope that this text will do just that.

Woodies CCI charts

Chart 1 below shows a single yellow horizontal line. This is called the Zero-line (ZL).
It has a special meaning in the calculation of the CCI. You may think of it as the
equilibrium of momentum over a given period. All of Woodies CCI system trade
patterns are defined around the zero-line. The chart shows four other lines. The light
blue are the 100/-100 lines and the white are the 200/-200 lines.

Chart 2 shows the ZL as a series of red and green segments. These segments reflect the
25 period Least Squares Moving Average LSMA. When the segments on the ZL are
green, this means that the market price is higher than the LSMA. When red, the market
price is below the LSMA. This is also called the moving linear regression curve. The
LSMA will be used in trade confirmation of patterns and exiting positions. It is not
important to understand how the LSMA is calculated.

Chart 1                                                                                     Chart 2

Zero-Line

        It is the major support and resistance at this moment in time.

Amplification:

                        "…at this moment in time", means that it does not represent a forward looking
                            projection of where the support and resistance will be in
                            moments from now, but where S/R is.
                        This line will be tested and crossed several times throughout the
                            trading day.
                        While a trend is defined by six or more bars above or below the ZL, a
                            cross by the CCI does not change the trend. You need at least six bars
                            on the opposite side of the ZL to reverse trend. Cautionary note: A
                            cross of the ZL in the direction opposite of the trend can indicate a
                            setup for a trade with the trend or the possibility of a trend change.
                        Do not take trades when a clear trend is not evident.
                        Attention is necessary when the CCI crosses the ZL. These are
                            important events during the trading day.
                            " It's breaking major support and resistance at this time...this will
                            give you confidence that the trade is going our way"

Chart 3 below shows the CCI line. It will always be the heavy black line on Woodies
CCI Charts. This will be presented as a histogram. The vertical gray lines will be called
time-bars It is not necessary to understand the calculation of the CCI line. However,
for those who cannot help themselves, the definition and calculation of CCI can be found
at www.stockcharts.com/education/IndicatorAnalysis/indic_CCI.html
 

Chart 3

Chart 4 shows the addition of a yellow line. Woodie only uses two CCI indicators to
trade with. One is the CCI 14 period, shown as BLACK, and called CCI. The other is
the CCI 6 period, shown as yellow and called Turbo CCI or TCCI. TCCI is used in the
drawing of trendlines. TCCI can be used as a warning that a pattern might be occurring,
or, in multiple contract trades, used in taking off part of the position.

Chart 4

Chart 5 shows the addition of red, green and yellow time-bars. The yellow time-bars
show the establishment of a trend, while the green bars show an uptrend, the red bars a
downtrend.

Chart 5

The Trend

trend n. - The general direction in which something tends to move
- A general tendency
- General line of orientation
- syn tendency
- syn course
- syn drift, movement
- syn vogue, style

Woodies CCI Trend (trend): A trend is established any time the CCI (black line) is
either over or below the zero-line (ZL) for six or more time bars. If the CCI trades on
the other side of the ZL this does not negate the trend. If above, trend is up, if below,
trend is down. The word trend is used in bold print throughout this text when referring
to Woodie's definition.

Amplification:

                        Defines the trend using the CCI indicator only
                        Does not use price bars to define trend
                        Does not use any moving average to define trend
                        Does not use a larger time frame to define trend
                        Uses the same chart to define trend as to spot a CCI pattern for the market
                        Each market will have its own trend. It is not to be considered when
                            taking a trade on another market. You do not need any other charts,
                            markets or indicators to see and define the trend. When learning
                            Woodie's CCI system, Woodie recommends that you trade with
                            the trend. You do not trade counter-trend trades until you have
                            learned the trade trend patterns first.

     
Chart 6                                                                     Chart 7

In Chart 6, we see that, after the yellow bar, we have a down trend. This is shown by
subsequent red time bars. It is still in a down-trend printing above the ZL for one or two
CCI bars (six maximum) but here we would be looking for shorts. But be warned that the
more bars that register opposite the trend established, the more we should stay on the
side line until the trend is redefined. Later, we see a second yellow time-bar above the
ZL, showing a change to an up-trend.

Chart 7 shows a mix of bars above and below the ZL. There is no defined trend. No trade.

Trend Agreement Trade Patterns
Let us now look to CCI trade patterns that are trend-following (trade patterns that are
in agreement with the established trend).

1. Zero-line Reject (ZLR)

The next three patterns involve line breaks, or violations, from chart peaks, sometimes
described as bumps. In these three patterns, lines are drawn from peaks/valleys or
bumps. We should refrain from using support, resistance, or, trend in describing the lines
that are drawn. These words bring to mind "price chart terminology" and their meanings
may confuse the reader with regard to the function of these lines when using Woodie's
CCI system. You do not trade against these lines, nor target exits, with regard to these
lines. They are only a visual aid to indicate when one of these patterns comes into effect.

2. Reverse Divergence (RD)
3. Trend Line Break (TLB)
4. Horizontal Trend Line Break (HTLB)

For the beginning trader, these four patterns should be all that you look for and learn to
trade. It is highly recommended to first practice trading on a demo platform. This will
help you recognize patterns and get some "screen time" without cost to you. When
trading on a demo, treat it with the serious goal of trading your own money successfully.

Zero-line Reject (ZLR)

This is where the CCI line is traveling in a direction opposite to the established trend
toward, or just through, the ZL and then, in a subsequent bar, reverses direction from that
of the established trend. To be considered a ZLR, the movement back to the ZL should
at least go back into the 100/-100 level then reverse back to trend direction. It is
preferred by some to get within the 50/-50 level for best results.

      
Chart 8                                         Chart 9

Chart 8 shows two ZLR lines. Trend is established down (six or more bars below the
ZL). CCI is moving back towards the ZL then reversing back in agreement with the
established trend. These two ZLR would command a short in both instances. We will
have a full discourse on how to execute the trading system later on. The important thing
now is to recognize the pattern.

Chart 9 shows a ZLR to the upside.

Chart 10

Chart 10 shows a ZLR where the CCI actually crosses the ZL then reverses back to trend.

            "I always wait until it crosses back over the zero line…it really hasn't rejected it
            until it crosses back over."

Reverse Divergence (Rev Diver-RD)

This is the second of the trend agreement trade patterns (also called a trend
continuation pattern). As such, the trade pattern must give a trade signal which is in
agreement with the trend as defined earlier. After the trend has been established, either
up or down, we look to see peaks/valleys on the CCI line. If we get two peaks/valleys
from the CCI line where the second peak/valley is more pronounced than the first, we
draw a line off the peaks angling towards the ZL. Where the CCI crosses the drawn line
(trend line) it is a trade signal. You can use TCCI and or CCI in construction of drawn
lines.

"You have to have something to confirm the Reverse Divergence, either crossing a major
line (100/-100), or crossing a drawn trend line."

Chart 11

Chart 11 shows two Reverse Divergence (RD) trades. The first trade shows that the
trend is up. We have a valley (an inside bump) where the second is closer to the ZL than
the first. A line is drawn connecting the two tops and extending into the future. The
violation of the line gives a trade signal (long). The second RD trade occurs with the
trend also being positive. We have two valleys, the first being less pronounced than the
second. A line is drawn connecting the two tops. When this line is violated by the CCI,
it is a trade signal(long). It should note that both trades were ZLR with a RD
confirmation.

Trend Line Break (TLB)

This is the third of the trend agreement trade patterns. Although this pattern is called the
Trend Line Break pattern, please try to put out of your mind any knowledge you have
with regard to price chart patterns and their trading techniques. This pattern can be either
trend agreement or counter-trend. We will look at this pattern when the trend is in
agreement. The trend line must originate from a peak/valley above/below the100/-100
line, and it is preferred if the peak/valley is above/below the 200/-220 line. This pattern is
usually a confirmation of a ZLR. When more than one of Woodie's patterns is in
agreement, the signal has a higher probability of success. TCCI can be used in
construction of trend lines but CCI is preferred. When the CCI line crosses the trend line
a trade is signaled.
"The closer the actual trend-line break to the zero line the better."

      
Chart 12                                                             Chart 13

Chart 12 shows a TLB uptrend. The trade signal is the crossing of the yellow line by the
CCI line. A white trend line is also drawn on this chart using the TCCI in its
construction. This is acceptable and usually draws a sharper line.

In Chart 13, the trend is down. The more peaks or bumps the stronger the signal. Note
in both charts that we had a ZLR trade first. The TLB usually gives confirmation to the ZLR.

Horizontal Trend Line Break (HTLB)

This is the last of the trend agreement patterns. It is also a line break pattern. The
pattern is where you have two or more bumps, or peaks/valleys, that are approximately
the same height on the same side as the trend. HTLB can also be a counter-trend trade.
This is discussed later. A line is drawn between the peaks extending out into the future.
This line must occur within the 100/-100 boundary and can be constructed with TCCI,
CCI, or both. When the CCI crosses the HTLB, the pattern is in effect. It is a stronger
signal when two or more bumps, or peaks, are used in the construction of the HTLB line.

      
Chart 14                                                                                 Chart 15

Chart 14 shows a HTLB to the downside.                            Chart 15 shows a HTLB to the upside.

Getting Started

There are patterns one should learn to recognize when first learning Woodie's CCI.
These are the patterns which agree with trend as defined earlier.
There are some successful traders who use only these basic patterns. Once again, it is
advisable to obtain a demo platform to watch patterns develop. You will, after a time, be
able to anticipate these patterns.

After you get comfortable identifying patterns and watching them set up, it is time to
learn the rules of trading Woodie's CCI.

Returning to the ZLR pattern in Chart 8:

Chart 8

The time bar where the CCI reversed back to trend is the entry signal (white arrow).
Here, you would sell at the market.
The exit would be the bar that reversed back towards the ZL (see rules for exiting trades below).
Note that the blue arrow points out that the TCCI turned back to trend two CCI time bars
before the CCI. This is a good warning that a ZLR is going to happen. The TCCI has a
strong tendency to lead the CCI.

It should be noted that the time bar on the example has been completed. With most
charting software, the charts will assume that every second is the close of a bar. That
means a signal could be given, then taken away, before the time bar actually closes, based
on the prices during that time bar.

Again, in Chart 8:

       
A                                     B                             C                                 D

Your screen could show all these patterns based on the last price before the time bar
closes. Chart A and Chart D show the ZLR pattern, but Chart B and Chart C do not.
This is one of the wiggle room parts of this system. What to do?

Wait until the time bars closes to enter? (Conservative)
Enter as soon as bar indicates a signal during price bar formation? (Aggressive)

Woodie would like the beginner to enter the market, if with 20 seconds left in the bar,
where a pattern presents itself. That sounds good, but how do you determine t-minus 20
seconds until close of time bar?

BESTDIRECTfast, along with others, have timers on their charts.

Chart 16

Chart 16 shows 18 seconds left in the time bar. All the rules are in place, so you sell the
market. For the beginner, it is recommended to enter a trade at the market.

You are strongly urged to use the 20 second rule. Besides the ZLR pattern, the three
other trade patterns will show CCI crossing the line break, and then not. They will all
have the same timing issue.

When initiating any trade on any pattern, a protective stop should be place. For the
beginner, it is strongly advised to use a price stop. (Note: This is the first time the word
‘price' has been used).

        "I place my stops one to two tics above or below the entry bar."

Rules for Exiting Trades using Woodies CCI

Woodie's exit signals are the same for all of Woodie's patterns. Below is a list of
Woodie's exit signals: "The key is to find the one that meets your trading style"

                  CCI hooking or going flat
                  CCI Trend line break
                  TCCI crossing into the CCI
                  CCI crossing the ZL
                  CCI hook from extremes (HFE)
                  CCI not moving / no progress
                  Profit about equal to hard-stop
                  When the LSMA disagrees with the trade

(source: Trading Woodies CCI System by Jeff )
www.woodiescciclub.com/Trading-Woodies-CCI-System.pdf

We will be looking at only three for the beginner. The other exits are for counter-trend
patterns and multiple entry and exits. They will not be covered in this text. Once you
have digested this text and practiced the principles you can go to the chat rooms and
inquire about the other exit rules.

CCI Hooking or Going Flat

    
Chart 13 a                                                         Chart 13 b

Recall, in Chart 13, we had a TLB with trend agreement. The entry was on the cross of
the yellow line. We, at the time of entry, placed a price stop/loss order based on
Woodie's rules. We stayed in the trade until the CCI hooked (CCI changed direction
back to the ZL). Exit would be on the time bar close indicated by the white arrow (Chart
13b). We would also cancel our stop order.

TCCI crossing the CCI

Returning to Chart 10:

      
Chart 10a                                                             Chart 10b

Recall this Chart shows a ZLR. You enter the position when the CCI changed direction
back to trend. Stay in the trade until one of the three exit rules comes into play. In this
case, it is when the TCCI yellow line crosses the CCI black line, as we see on Chart
10b as indicated by the white arrow.

CCI Hook From Extremes (HFE)

This is the last exit rule that a beginner should learn. It is similar to the CCI Hooking or
Going Flat rule. The difference is that the CCI is starting to change direction after it has
crossed the 200/-200 lines. Here, we don't wait for the bar to close, or even 20 seconds
prior to the close. We look to get out when CCI just hints a change of direction, long
before the time-bar close. On Chart 14b, we go with the yellow arrow and do not wait
until time bar close or even 20 seconds prior to close.

Going back to Chart 14:

      
Chart 14a                                                     Chart14b

Woodie's CCI Patterns That are Counter-Trend or Trend -Changing Patterns:

1. The Famir Trade
2. The Vegas Trade
3. The Ghost Trade
4. Hook from Extreme
5. TLB counter-trend
6. HTLB counter-trend

The Famir Trade

The Famir pattern could be considered a ZLR pattern which immediately fails on the
next or subsequent time bar(s). As with the ZLR pattern, Famir has the most success
within the 50/-50 boundary of the ZL. It is a hard trade for beginners, not in seeing the
pattern, but living with and feeling the trade internally. This is because the beginner has
just suffered a loss on an executed ZLR and now has to reverse his position. This
predicament can be further frustrating if the Famir trade pattern then fails, leaving the
newcomer with a sense of total loss. That being said, the Famir trade pattern is very
successful and popular among Woodie's system followers. Here, the LSMA comes into
play. If the LSMA is in agreement with the Famir, it gives more confidence to the trade.
The LSMA shows agreement-buy color; red for going lower and green for going higher.
"I won't take them if the LSMA is not in agreement"

      
Chart 17                                                             Chart 18

Chart 17 shows a Famir to the down side. Note that the LSMA is red during the ZLR.
When the Famir pattern occurs, the LSMA is red, in agreement with the patterns trade
signal. Note also that the creation of the Famir took more than one time bar.
Chart 18 shows a Famir right at the ZL, with a one-time bar failure. The LSMA is green
and in agreement with the Famir trade signal.

The Vegas Trade

The Vegas Trade (VT) is another counter-trend trade. The pattern has a few key
elements. First, the CCI line must have extended to or past the 200/-200 line (gone to
extremes) in agreement with the trend. It then should reverse back towards the ZL at
least through the 100/-100 line. On this retracing back to the ZL, the CCI line then
forms a rounding, or sideways, pattern (minimum of three time-bars) and then reverses
back to trend. This rounding looks like a dome under the ZL, and a cup above the ZL.
The subsequent return to trend is called "the Johnny-come-lately guys". The pattern is
in effect when the CCI line reverses back again towards the ZL and exceeds the
rounding swing low/high.

      
Chart 19                                                             Chart 20

Chart 19 shows a VT to the upside.                 Chart 20 shows a VT to the downside.

The Ghost Trade

The Ghost trade is a counter-trend trade which derives its name from the pattern created.
It includes three peaks of the CCI which are in agreement with the trend. For a
beginner, it is necessary that the middle peak be larger than the first and the third. To
Edwards and Magee fans, this pattern looks like a head and shoulders, but is not limited
to all of their rules. After the first and second peaks/valleys, valleys/peaks were created.
These valleys/peaks are where the CCI line reverses back to trend. We draw a line
break from the valleys/peaks and extend this line into the future. When this line is
violated, coming off the third peak/valley, a counter-trend trade is signaled. It should be
noted that the line-break (neckline if you prefer) can be horizontal or slant towards or
away from the ZL. Woodie believes that the line slanting towards the ZL is favored, but
all work well.

      
Chart 21                                                              Chart 22
Chart 21 shows GHOST to the upside.         Chart 22 shows GHOST to the downside.

Hook from Extreme

This trade pattern is the easiest to identify. We discussed this pattern earlier as one of the
exit rules. As a counter-trend trade, it materializes when the CCI line exceeds the 200/-
200 line than reverses back against the trend towards the ZL. This is a very volatile
trade. To Woodie, it is the least-favorite trade pattern. So, CAUTION is advised. For
the beginner, it is advised not to trade it. It can be used a pre-signal for other countertrend
patterns, such as the TLB and HTL discussed earlier, and the TLB counter-trend
trade pattern which is introduced next.

      
Chart 23                                                                 Chart 24
Chart 23 shows HFE to the downside.              Chart 24 shows HFE to the upside.

TLB counter-trend

The Trend Line Break counter-trend is a pattern that can be constructed by using CCI or
TCCI peaks/valleys. The line break is drawn from upside or downside peaks/valleys.
As oppose to trendlines in price chart terminology and practice, with Woodie's CCI we
are only looking for violations, or crossing, of the drawn line by the CCI. The line
should not be considered support or resistance. When a violation of the line occurs, a
trade is signaled.

In both examples below, both TLB counter-trend were preceded by an HFE. This
should be a sign of a stronger signal. Also, TCCI was used in the construction of both.
Some traders prefer to use trend lines from the CCI line only, but both are acceptable.

      
Chart 25                                                             Chart 26
Chart 25 shows trade to the upside               Chart 26 shows trade to the downside.

HTLB counter-trend

This is another line-break pattern. This pattern is constructed by looking at either TCCI,
CCI, or in combination, where valleys/peaks (or internal bumps) line up horizontally to
form a line-break. Once this line is violated a trade is signaled. It is best to have these
horizontal lines form within the 100/-100 lines. This signal could also occur in
conjunction with a HFE or TLB pattern.

      
Chart 27                                                                 Chart 28
Chart 27 shows trade to the downside.             Chart 28 shows trade to the upside.

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If you have any questions about this text, please send me an E-mail to:joconnell@pfmail.com