May 2009 • Volume 3, No. 5
FUTURES STRATEGY:
Short-term CCI p. 10
ADJUSTING TO
stock index futures shift p. 14
STRADDLES, STRANGLES,
and volatility p. 16
FEAR AND LOATHING
in the options
market p. 20
TRADING IRON
CONDORS
in volatile
markets p. 22
FUTURES,
OPTIONS
volume down,
not out p. 24
OPTIONS STRATEGY LABTRADING STRATEGIES
10 May 2009 • FUTURES & OPTIONS TRADER
BY KEN WOOD
The CCI ghost
Note: A version of this article originally appeared in the May 2004 issue
of Active Trader magazine.
If asked, most people would likely say they’ve neverseen a ghost. And chances are, the majority of traderswould probably give the same response when asked if
they’ve ever traded the Commodity Channel Index (CCI).
However, spotting a pattern in the CCI called the “ghost”
can alert you to favorable trade opportunities. The setup is
easy to identify and appears regularly — two helpful fac-
tors for all traders. The pattern’s name is a reference to its
tendency to jump out and yell “Boo” when price itself is
communicating very little about what the market will do. In
fact, the ghost pattern is so well defined you can base trades
on it without having to directly consult price action.
For those people unfamiliar with the CCI, this indicator
essentially is an oscillator (a tool designed to highlight over-
bought or oversold conditions) that measures the difference
between the current price and the average price over a
given period. However, the CCI uses unique calculations to
define these aspects of price. “CCI background” explains
the indicator in detail.
The ghost pattern is one of several CCI trading patterns
that evolved from years of trading and watching the mar-
kets. The following identification and trading guidelines
reflect firsthand use of this indicator.
Pattern characteristics
and trade management
The CCI ghost is the indicator equivalent of the head-and-
shoulders price pattern, which is a reversal formation con-
sisting of three peaks (at a market top) — the highest peak
in the middle being the “head” and the two lower peaks on
either side of it being the shoulders (see Figure 1). A move
below the “neckline” (a trendline connecting the shoulder
lows) is typically used to trigger a short trade or sale.
Figures 2-6 show various intraday charts accompanied by
14-bar CCIs containing ghost patterns. Although the patterns
in these figures form above or near the zero line, many form
around +100/-100 as well. Like the head-and-shoulders price
pattern, the entry signal for a trade is a break of the ghost’s
neckline. A ghost that signals an upside reversal and a long
trade is referred to as an “inverted ghost.”
Figure 2 shows a bearish ghost pattern on a three-minute
chart that signaled a short trade when the indicator
dropped below the neckline (and almost simultaneously
A well-known chart pattern gets put to a new use when applied to a little-used indicator,
resulting in trade setups that jump out when you least expect them.
The H&S pattern consists of three peaks. A move below
the trendline connecting the lows of the two shoulders in an
H&S top constitutes a sell signal. The pattern is reversed at
bottoms.
FIGURE 1 — THE HEAD-AND-SHOULDERS
(H&S) PATTERN
FUTURES & OPTIONS TRADER • May 2009 11
fell below the zero line).
In Figure 3 an inverted ghost sig-
naled a long trade shortly before the
market moved out of a consolidation.
Again, the penetration of the neckline
and the move above the zero line were
almost concurrent.
The CCI provides exit targets in
addition to entry triggers. The target
for the ghost pattern is calculated by
subtracting the distance from the
neckline to the top of the head (in CCI
points) from the neckline break point
(again, the same “classic” method
used to calculate a price target with
the head-and-shoulders price pat-
tern).
Several exit techniques can be used
with the CCI ghost pattern. The first is
to exit the entire position at the target
level. Alternately, you can take partial
profits at that point and leave some of
your contracts to run until an extreme
CCI reading of +200 (following a long
trade) or -200 (for a short trade)
occurs. Another approach would be to
exit when price breaks out above a
down trendline connecting the head
and right shoulder of the pattern. A
stop-loss should be placed as soon as
your entry is filled. Once profits have
been taken at the target level, move
the stop-loss to the breakeven level.
Reverse the rules for inverted ghost
patterns and buy setups.
Figure 4 shows a short trade exam-
ple with the initial price target
occurring just below the zero line
and the second target being reached
when the indicator fell to -200.
Time frames
The ghost pattern forms on different
time frames, in all markets. You
should experiment by looking at dif-
ferent charts to see how and when
the pattern appears. For day trading,
three- and five-minute charts are a
continued on p. 12
The Commodity Channel Index (CCI) came about partially as a result of an accident.
The indicator’s developer, Don Lambert, designed the CCI not for trading purposes,
but rather to test the computing capabilities of a portable calculator.
Perhaps because Lambert never intended to use the indicator for trading pur-
poses, relatively little has been written about the CCI compared to other trading
tools. The CCI measures how much the current price (specifically, the typical price
of a bar — the average of its high, low, and closing prices) deviates from the aver-
age of the typical prices over a specific lookback period (e.g., five bars, 10 bars,
etc.).
The indicator fluctuates around a “zero line,” with a majority of its readings
between -100 and +100. High readings mean the current price is unusually high rel-
ative to the average price over the lookback period. Interestingly, while the CCI is
now used primarily as an oscillator, its original role was to signal breakout conditions
— when the indicator moved above +100 or below -100, it signaled exceptional up
or down strength and the possibility of continued price movement in that direction.
You can follow these steps to calculate the CCI in a spreadsheet:
1. Calculate the “typical price,” which is the sum of the high, low, and closing
prices, divided by three, for each bar in the desired look-back period
(e.g., 14 bars).
2. Calculate a moving average of these typical prices over the desired
look-back period.
3. Calculate the difference between each typical price over the look-back
period and the moving average of the typical price for the respective bar.
4. Sum the absolute value of all the differences from step 3 and divide
by the look-back period.
5. Subtract the value calculated in step 2 from the last bar’s value as
calculated in step 1, and divide it by the value calculated in step 4 times
0.015. (The factor 0.015 will force most readings to fall within +/- 100.)
Figure A shows an example of an Excel spreadsheet containing the calculations
for a five-day CCI (row 1 identifies the data in each column). Repeat each formula
for every row that contains price data in columns C through E.
• Calculate typical price: In cell H3: =SUM(C2:E2)/3
• Calculate moving average of typical price: In cell I7: =AVERAGE(H3:H7)
• Calculate the CCI: In J7: =(H7-I7)/((ABS(H7-I7)+ABS(H6-I7)+ABS
(H5-I7)+ABS(H4-I7)+ABS(H3-I7))/5*0.015).
Theoretically, there are no limits to how high or low CCI values can go. Because
of their construction, however, most markets will have a large majority of their CCI
values between the +/- 100 levels, and very seldom should you see readings above
or below +/-300.
For more information on the CCI, see “Indicator Insight: The Commodity Channel
Index,” Active Trader, December 2001.
CCI background
The CCI’s rather complex calculation can be performed easily in Excel. This
spreadsheet is available at http://www.activetradermag.com/index.php/c/Strategy_code.
FIGURE A — CALCULATING THE CCI
12 May 2009 • FUTURES & OPTIONS TRADER
good place to start. Those who prefer swing trad-
ing might want to consider a 30-minute (or 233-
tick) chart. For position trading, daily charts (and
a 20-period CCI) can be used.
Figure 5 shows a slightly longer-term trade
than the previous examples — a swing trade
setup on a 233-tick chart. A short trade would
have been triggered at the CCI neckline break,
resulting in an entry price around 9,575. The mar-
ket gapped down on the open the following day.
The distance from the neckline and the head was
220 CCI points and the neckline break occurred
around +50, making the price target -170 on the
CCI. This objective was reached in 10 bars at a
price of 9,520.
Figure 6 shows a ghost pattern in the
Eurocurrency (EC) that failed to meet its objec-
tive. Using a CCI trendline break to exit resulted
in a small loss.
“Priceless” trading
One thing you may have noticed about these
chart examples is they discuss trades in terms of
TRADING STRATEGIES
This bullish ghost pattern triggered a buy that caught an up move out
of a consolidation.
Source: TradeStation
The CCI forms a bearish ghost pattern and signals a short
trade immediately before a sharp down move.
FIGURE 2 — SHORT-SIDE GHOST
Source: TradeStation
FIGURE 3 — INVERTED GHOST
Pattern snapshot
Strategy/pattern: CCI ghost
Markets: All
Time frame: All (intraday examples used in this
article).
Setup: A 14-bar CCI must form a
head-and-shoulders (top or bottom)
formation.
Entry: Enter on a penetration of the pattern’s
neckline.
Stop: Set initial stop per your personal money-
management parameters. (On a pattern
basis, a move above the shoulder of the
ghost would negate the pattern; a stop a
little above this level is a logical place to
experiment with this parameter).
Exit: The initial trade target for a CCI ghost
top pattern/short trade is the difference
between the head and the neckline
subtracted from the neckline penetration
point. Liquidate the entire position at this
point, or take partial profits and move the
stop up to breakeven. An example of a
secondary target is a CCI move above
+200 or below -200.
FUTURES & OPTIONS TRADER • May 2009 13
CCI points rather than price points. Most
traders are accustomed to focusing exclusive-
ly on price bars when executing trades.
However, the fluctuation on a chart can create
false impressions of what the market is going
to do and lead to conflicted trading. This
could cause you to exit a trade early, just as the
market is about to move your way.
For more experienced traders, an essential
aspect of trading the ghost pattern is using the
CCI, not price action, to identify trade oppor-
tunities. Trading is nerve-wracking enough
without the extra stress of bouncing price bars;
focusing on the CCI enables traders to elimi-
nate the noise on a price chart and concentrate
on entries and exits.
Trading without prices — by hiding or cov-
ering the price bars — eliminates fear and con-
flict. The ghost pattern will still be there in the
CCI. This “priceless” trading is certainly far
removed from typical technical trading
approaches — which is ultimately something
of an advantage.��
For information on the author see p. 6.
A longer-term swing trade is shown on this 233-tick chart. A short trade
would have been triggered by a CCI neckline break, corresponding to an
approximate price level of 9,575 (upper red arrow). The market gapped
lower the next morning.
FIGURE 5 — OVERNIGHT POSITION
Source: TradeStation
This chart shows how the CCI ghost can generate two simple price
targets: The first target is determined by subtracting the distance
between the head and the neckline penetration from the neckline
penetration level and the second is a move to an extreme CCI reading
in the opposite direction — in this case, -200.
FIGURE 4 — PRICE TARGETS
Source: TradeStation
This bearish ghost pattern failed to produce
much downside follow-through, and a move
back above the trendline connecting the head
and the right shoulder was used to stop out
the trade.
FIGURE 6 — FAILED PATTERN
Source: Sierra Charts
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