The CCI Divergence Forex indicator determines divergences between price and the CCI technical indicator. Divergences are an effective technique for detecting early trend reversals on any time frame. The indicator appears as a colored histogram with buy/sell arrows in both a separate and main MT4 chart window. The CCI Divergence indicator can be used in conjunction with your favorite trading method as an additional trend filter.
What is the CCI Divergence Indicator?
The Commodity Channel Index (CCI) Divergence Indicator is a useful tool for technical analysis. It detects hidden divergences between the price and the CCI technical indicator, as the name implies. Divergence indicates probable market reversal points and, as a result, attractive entry possibilities for traders. Detecting divergence is a difficult task. Fortunately, the CCI divergence indicator does the job. While the indicator can be used by any trader, it may be most useful for divergence and reversal traders.
CCI Divergence Strategy
The CCI divergence indicator analyzes the price chart and the pivot value. It also connects the chart’s troughs and peaks. When the price chart indicates higher lows but the oscillator makes lower lows, there is a hidden positive divergence. Similarly, a hidden bearish divergence happens when the oscillator makes higher highs but the price makes lower highs. The visible bars on the chart represent CCI divergence. Green bars represent an upswing, while red bars represent a decline. The indicator returns +1 if it identifies bullish divergence (forms green histogram). In contrast, if the divergence is bearish, the indicator falls below -1 (red histogram). If there is no divergence, the indicator returns a value of zero. In other words, if there is no divergence, the indicator does not display any bars.
Buy Signal
The following could be your checklist for a buy trade:
- When the prevailing trend of the asset is bullish.
- When the CCI divergence indicator on the chart displays a green arrow.
Once these events occur:
- You could open a buy position after the green arrow shows up and you confirm your entry with bullish candlestick patterns.
- You could set your stop loss just below the nearest swing low.
- You could set your take profit at the nearest resistance zone, or you could exit trade when a red arrow shows up on the chart.
- For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Sell Signal
The following could be your checklist for a sell trade:
- When the prevailing trend of the asset is bearish.
- When the CCI divergence indicator on the chart displays a red arrow.
Once these events occur:
- You could open a sell position after the red arrow shows up and you confirm your entry with bearish candlestick patterns.
- You could set your stop loss just above the nearest swing high.
- You could set your take profit at the nearest support zone, or you could exit trade when a green arrow shows up on the chart.
- For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
CCI Divergence Pros & Cons
Pros
- The CCI Divergence Indicator can be used to detect divergences for traders who use technical analyses in order to complement their trade ideas.
- The indicator gives entry and exit signals at probable trend reversal or trend continuation zones.
Cons
- Trading with divergence may require additional knowledge of price action.
- The measures that ‘statistically turn price and volume data’ are likely to lag after the price itself and to provide ample historical data, which is already contained in it.
Conclusion
The CCI Divergence Indicator is a nice tool for detecting trend reversals. Divergence appears as a powerful tip for good trade entry. Remember to use the indicator in conjunction with other tools and comprehensive investigation. Furthermore, you could always apply a stop loss to avoid large drawdowns if the technique fails. One thing you shouldn’t do is expect one indicator to always give you excellent signals.
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