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Indicators like the CCI index are used in forex trading to mainly identify overbought and oversold conditions in the market, but it can also be applied in various other ways as well. Alternately, forex traders also use the cci indicator to warn about extreme market conditions when trends are the strongest or weakest.
Many beginners in forex trading usually apply a technical indicator using a uniform set of rules. Traders then apply the rules blindly regardless of whether the markets are trending or ranging. No wonder then that most beginners complain that indicators such as the commodity channel index do not work as expected. What many do not know is that indicators such as the cci index can behave completely different to changing market conditions.
Therefore, using them in a standard way will not result in optimal results. This lesson will help to clear any confusion you might have about using the cci indicator or a cci trading strategy. It will also help you to understand the math behind how the cci indicator values are calculated. You will also learn how to properly read the technical signals from the forex cci indicator.
Last but not least, you will know how to apply this knowledge and how to improve your technical analysis when using the commodity channel index indicator. What is the CCI indicator? The CCI indicator or the commodity channel index indicator, as we have just learned is an oscillator.
Below is the cci indicator in Metatrader. It is one of the many standard indicators that are available by default, so you do not have to download any custom indicators. Figure 1: The Commodity Channel Index indicator The forex cci indicator belongs to the group of oscillators that measures momentum.
But what is momentum? In physics, momentum is described as the quantity of motion in a moving body. Momentum is measured by mass and velocity. You might now be asking, how a concept in physics made its way into the forex markets? When it comes to the financial markets, forex for example, momentum takes a slightly different meaning.
However, the overall concept remains the same. Imagine you are riding a motorbike. When you increase the accelerator, you put some effort the engines begin to draw more gas, and the pistons drive the machine. After a while your motorbike starts to speed up. Now, even if you ease back on the accelerator, the momentum that was built, will continue to keep the motorbike moving forward even without any effort.
At some point, as momentum starts to wear off, your motorbike starts to slow down as well. Eventually your motorbike comes to a standstill. The cci forex indicator simply calculates and visually depicts how fast prices are rising or falling.
The speed at which the price of a security rises or falls will tell you whether price will continue moving in that direction or not. Of course, when momentum wears off, you can expect price to pull back; either make a correction or reverse trend completely or even move sideways.
It is as simple as that. Period Type of price Levels Period: The period in the cci indicator setting is used to set the number of look-back periods. The standard cci setting is 14 periods. This value can be changed based on the forex cci strategy that you use.
Type of price: The type of price is a drop down that you can select. The standard setting is Typical price. Typical price is simply the average of the High, low and close. These values can of course be changed as well. In Figure 2, you can see the CCI indicator in the metatrader trading platform. We use only the default values to keep things simple. We have the standard forex cci indicator with the default settings which is a period lookback period.
This serves as the basis for calculating the cci data for the past periods. If applied on the daily chart this would be days or if applied on a 1-hour chart, this would be the past 14 hours. Similarly, when the cci indicator falls below , the indicator suggests strong downside momentum and signals a continuation in the decline in price.
Figure 2: CCI indicator in metatrader with default settings Understanding the cci calculation So far we have learned what momentum is, and how the cci indicator is used to signal the momentum in price. Now, it is time to understand the cci calculation to get a complete view of how the indicator plots the values. The values are then summed up and divided by the total number of periods, which is If the above calculations look a bit complicated, do not worry.
The main takeaway you should concern yourself with is that the CCI indicator uses the typical price and measures it against the period simple moving average value. The result is then divided by the constant 0. Generally, when momentum in price is strong, you can expect a deviation from the mean price.
As long as the momentum exists, price will continue moving in that direction rising or falling. Or simply, a correction in the most recent price trend. In summary, the CCI calculation measures how fast prices are rising or falling, by moving within the fixed levels mentioned. Now that we understand how the cci indicator works, the next step is to know how the cci indicator is used. What is the CCI indicator used for?
A CCI trading system can be built in the following three ways, depending on how the markets are behaving. When a trend exhibits strong momentum, there is a high probability that price will continue rising or falling. This means you can expect price to continue in the same direction. So, the next time you want to know how strong the trend of a security is, simply look at what the cci indicator is suggesting. Using the CCI as a trend indicator is ideal when combined with other trend indicators such as moving averages.
This can help you to pick bottoms in a rally or tops in a decline. CCI negative divergence occurs when the CCI indicator plots a higher high, while the price forms a lower low swing point. When CCI divergence occurs in the market, traders should expect market momentum to slow down.
This is usually followed by a ranging market and eventually, a reversal or continuation will occur in the market. Fig 4: The CCI indicator shows positive and negative divergence. To confirm a bullish or positive CCI divergence, wait for the CCI to break above the zero line or the nearest resistance level in the market. To confirm a bearish or negative CCI divergence, wait for the Commodity channel index to break below the zero line or nearest support level. When using the CCI indicator in forex, commodity, options, stocks, or crypto markets, we apply different timeframes ranging from 5 minutes to even months depending on a strategy.
The CCI indicator can be applied in any market timeframe hence giving us an advantage when trading. In this advanced strategy taking into consideration the high volatility of the CCI indicator, we will introduce a 50 exponential moving average to help us filter the unnecessary market noise. STEP 2: Wait for a pullback. When waiting for a pullback in price is a more conservative trading approach.
In this case, to look for long or buy entries, we have to trigger signals. We wait for a retracement or a sharp price correction to take our trade in the major uptrend direction of the market. When we have a weak retracement, it means the major trend is still strong and the market will continue to rally higher. Avoid taking trades when major retracements occur in the market. To put your stop loss, identify the last recent swing low area or a few pips below the 50EMA.
We use two trading strategies when it comes to taking the profit and exiting the market. We exit our trade and bank the profits. Fig 4: Advanced CCI indicator buying option strategy. Note: The above explanation is when taking a long position, you can take a short position by implementing the opposite. You can use both of them depending on your trading strategy, or you can combine both of them. This makes the commodity channel index a great choice compared to the RSI indicator.
Watch the commodity channel index video below to understand more Conclusion The CCI indicator is a powerful tool that traders can use when you take into consideration the powerful signals it gives in a given market. Unlike other indicators, the versatility of the CCI makes it reliable when trading stocks, forex, cryptocurrency, or even options.
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