The CCI indicator is popular for technical analysis when you are looking for buy and sell signals on currency pairs. The CCI crossover strategy is used to enter when the market is showing overbought or oversold conditions. You could blindly take these CCI signals alone, but I think that gives too many false signals. I would prefer to use additional indicators and other forms of market analysis to confirm the entries. This helps to form a more complete CCI crossover strategy which I will explain within this article.
What is the CCI?
The Commodity Channel Index (CCI) expresses variation of a currency pairs price based on its statistical mean. Using the CCI can help you identify excess buying or selling pressure when it crosses above the +100 level (overbought) or below -100 (oversold).
It can also be used to spot CCI divergence. If the price on the chart makes consecutive highs, and the indicator shows consecutive lows, this is called CCI Divergence. On the contrary, if the price on the chart makes consecutive lows, and on the CCI indicator, we see consecutive highs, this is also a CCI divergence.
What are the best CCI settings?
The default CCI period is 14 which is used to calculate the statistical mean, although short-term traders might want to reduce this number while long-term investors may extend it in order to create more reliable signals. Just keep in mind that the short you set the CCI timeframe, the more susceptible it can be to market noise which I find is much less reliable.
You can use the CCI indicator on any forex chart timeframe. I find that there can be a lot of market noise when using it on the lower timeframes below the 1-hour charts. This can lead to poor signals. The larger timeframes such as the 4-hour, daily and weekly, tend to give stronger signals as they contain more price data.
For example, if you were using a 7-period CCI on the 5-minute charts, you would get lots of entries but many of them would be false signals. If you were using a 21-period CCI on the 4-hour charts, you will get much less signals but they will probably be more reliable.
How to trade the CCI crossover strategy?
As mentioned, I wouldn’t take the CCI crossover signals on their own. Instead, I would use a trend trading indicator such as the moving average to enter in the direction of the trend. I would also like to confirm and time the entry with candlestick patterns. You can use any combination of indicators for technical analysis that you like to filter the CCI signals.
CCI crossover strategy buy signal
- Price is above the 200 moving average
- CCI is around the oversold area
- Bullish price action
You can see from the GBP/USD 4-hour chart below that the CCI is below the -100 level which is suggesting that the currency pair is oversold and may be losing some downwards momentum. The price is above the 200 moving average and we have an inside bar candlestick formation. These are all bullish signals. If you would have checked the lower timeframes for additional confirmation, you would see that the last few bars had formed a resistance level which was also breached as another indication price was on its way up. We could have put a stop loss just below the recent swing low which would have been around 100 pips. Considering the trend continued for over 600 pips, this would have been a good trade.
CCI crossover strategy sell signal
- Price is below the 200 moving average
- CCI is around the overbought area
- Bearish price action
In the GBP/USD 4-hour chart below, you can see that the price is below the 200 moving average and the CCI is in the overbought zone above 100. Price is bouncing off a resistance level and showing bearish candlestick patterns, including shooting stars. We could enter where I have marked off on the chart or wait until the support level that formed below was breached. Either way, there were strong bearish indicators. The stop loss could have been very tight on this trade which is great when you consider price trended down over 1,500 pips.
Advantages of the CCI crossover strategy
- Plenty of trading signals
- Can be used on any currency pair
- Can be used on any chart timeframe
- Enter in ranging and trending markets
- Can be combined with other indicators
- Easy to interpret signals
Disadvantages of the CCI crossover strategy
- Requires good money management
- Need to time entry and exit
- Lots of false signals
- Doesn’t work that well on its own
Conclusion: is the CCI crossover strategy any good?
Yes, I think the CCI crossover is a powerful forex strategy when implemented correctly. I wouldn’t take the CCI crossover signals as they are without further market analysis to confirm trades. You will also need good forex money management and discipline. This can be the difference between a winning and losing forex system.
If you want to give the CCI crossover strategy a try, you could always practice on a forex demo account to begin with. You can get a free demo account from most forex brokers. This will enable you to test your trading skills, learn from your mistakes and build your confidence without any unnecessary risks.
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