Woodies CCI With a 5 Simple Moving Average

Today we discussed the Woodies CCI With a 5 Simple Moving Average added to it in order to confirm a divergent high that was failing....and then did indeed fail at that high.

Now it doesn't mean that we would go short there and that depends on the trader.  But if you were long and the market did indeed make a higher high.....with Woodies CCI showing clear divergence, well it could have been a great opportunity to get out.

Now what the 5 SMA shows is that the 14 period CCI was on the wrong side of the moving average....and it was not getting through.  And you can see that in the picture below.

Click on image to enlarge

So most traders will wait for confirmation of some sorts, in order to get into a trade.  You know, something like price coming back to test a 21 SMA or EMA.  In fact Linda Raschke calls that the Holy Grail trade....because it is about the most reliable and best trade that you can get.

Well this is a higher high and typically you would not try and short the very top of a high, but as I said if you were long....ESPECIALLY so close to the close of the week.....it would have been THE exit!!!

Now to add the 5 Simple Period Moving Average, you can see the Indicator Box for Ninja Trader and the Data Source and Pane selection is what is critical.  And WHY do you ask?

Well we want the 5 SMA to be using the data OF THE 14 CCI and not use the price data.  So look at the Magenta line following the white line which is the 14 CCI.  It follows close and is smooth.

Now if you are good at creating indicators within Ninja Trader....or your platform.....what ever you use, you can have the price bars change color when the CCI crosses above or below the 5 SMA.

BUT you need to regard that in context with market conditions and not just trade it blindly.  But it can definitely be used for Permission  to go in that direction when you have confirmation.

But why would we do that?  And what do I mean by permission?  Well just think of driving a car.  You are sitting at a red light and getting ready to go.  Then the light turns green.  What do you do?

You see you are programmed by a simple color change to do something.  So if you are getting ready to go long and you are waiting and then the bar turns green or blue.....you go.  Now does that work all the time?

NO!

And that's why I say that we need to use it in context of what the market is doing.  When the market is in a choppy zone....the color will change back and forth.  BUT when the market is in an up trend and we get a pullback, or a bull flag, and then we get a cross.....that would be in context of what the market is doing in the predominant direction.  You can think of it as a possible trigger....when you are sitting there waiting to click your mouse.

Anyway I hope that helps our readers.  This is what we were discussing in the Live Trading Room today and I thought that I would throw it out there on the blog for our trading friends.

Good trading!!!