Author: Nikolay Kositsin
Adapted from Backtesting to Find a More Reliable CCI Signal article
As traders, we should always be investigating ways to find a new edge or
to increase the edge that we already have in our strategies. When I
first began trading, this meant attempting to combine multiple
indicators together, adjusting parameters for each one, and creating
new, more complicated indicators in hopes of turning a profit. But after
my first two years of trading, I discovered that often times the
simplest strategies are the ones that give me the results I am looking
We traditionally look to enter trades when the CCI crosses under +100 or
above -100, but what if we also took into account how large the CCI
became before crossing the +/-100 level? For example, sometimes the CCI
will barely get beyond +/-100 before crossing back. But what about the
times when CCI reaches 150, 200 or even 300? Shouldn't that create a
more reliable signal for us? Because after all, the more extreme the
initial move, the more extreme the pullback could be. The image below
shows a CCI oscillator with CCI reaching levels beyond +/-100.Testing Our Theory
To test this train of thought, we could go to the charts and manually
see if there is a correlation between how far the CCI reaches and how
successful each trade would have been, but that would take a very long
time. Ideally, we want to look at hundreds of trades as efficiently and
as quickly as possible.
Here is a summary of all the parameters used in my backtests.
While a traditional CCI (+/- 100) turned a $1,000 account into a $1,114
account, we can clearly see that using a confirmation level of 170
yielded much greater results, posting an ending balance of $1,362. But,
requiring larger confirmation levels led to diminishing returns,
rendering the strategy unprofitable above a confirmation level of 270.
You will also notice that as the confirmation level was increased, the
strategy placed less trades overall. This is logical sense the higher
levels of CCI are much more rare.
These results indicate that using a CCI confirmation level before
placing a trade on a CCI cross could be a viable trading strategy to
further research. Now, let's turn to the AUDJPY results.
The traditional CCI turned a $1,000 account into $734. This was a much
poorer result than what we saw on the EURUSD. But once again, we saw
that the results on average were much higher when we filtered based on a
higher Confirmation level. While the 170-180 level was an improvement,
better still was using a higher Confirmation between 230-260. At those
levels, this strategy would have turned a profit of 10-20% from our
initial $1,000 account.
Looking Forward After a Backtest
Historical performance is not indicative of future results. This is
something we should all be aware of, but the tests shown today could
help lead us to some new ideas that might yield better results as we
move into the new year.