The CCI divergence strategy can be very useful for identifying when to enter and exit the forex market. I think CCI divergence is often overlooked by forex traders who think the CCI indicator is simply for spotting overbought and oversold market conditions. Whilst it can do a good job of that, I find that the CCI crossover strategy can give too many false signals if you do not keep an eye on the CCI divergence. I would also include some other technical indicators and analyse price action before making any decisions on whether to take a potion or wait for the next opportunity to come along.
What is CCI divergence?
CCI divergence is when the price on the chart makes consecutive highs, and the CCI indicator shows consecutive lows, or the price on the chart is making consecutive lows whilst the CCI show consecutive highs. Basically, while price moves one way, the CCI indicator moves in the opposite direction. It is a sign that the price may start reversing and that we could see the start of a new trend forming.
How to trade with CCI divergence?
Basically, we are looking to trade in the direction that we see the CCI divergence occurring. The CCI is a relatively sensitive indicator which means that divergence can produce far too many signals. However, we are not going to blindly take each CCI divergence signal that we see. Instead, we will use other indicators and price action to confirm our trades.
- A bullish divergence occurs when the currency pair price makes new lows while the CCI indicator starts to move in an upwards direction.
- A bearish divergence occurs when the currency pair price makes new highs while the CCI indicator starts to move in a downwards direction.
CCI divergence settings
I personally like to keep the default periods of the CCI which is 14. If you reduce the period, there is probably going to be even more false signals than usual as the indicator is already prone to sensitivity. If you increase the CCI periods, you might get less signals but I think they could be more reliable as they will contain a lot more price data.
Another thing that you need to think about is the chart timeframe you will use. I find that anything below the 1-hour charts can give a lot of false CCI signals. The 4-hour charts and above tend to be even more reliable in my experience. Regardless, there will always be false setups which is why good forex money management is so important with any trading strategy.
Buy signal
- Price is above the 50-period SMA
- CCI divergence to the upside
- Bullish price action
In the USD/JPY 1-hour chart below, you will see that price is above the 50-period moving average which suggests we are in an uptrend. There is strong CCI divergence upwards confirming this. We also have lots of bullish price action including price bouncing from a support level and hammer candlestick patterns. We could have placed the stop loss just below the support level which would have been around 30 pips. That’s good when you consider this uptrend continued for over 650 pips. We could have used the 50 MA for a trailing stop to maximise the move as much as possible.
Sell signal
- Price is below the 50-period SMA
- CCI divergence to the downside
- Bearish price action
In the USD/CAD 1-hour chart below, you will see that all of the conditions have been met for a sell trade. We can see that price is below the 50 SMA and there is strong CCI divergence in a downwards direction. Price breaks through a recent support level and we have bearish price action with red bars following market indecision shown by doji candlestick patterns. We could have placed the stop loss just above the recent swing high point which would have been around 30 pips. This downtrend went for almost 250 pips, which gives a very favourable risk to reward ratio. We could have moved the stop loss to the most recent swing highs on the way down to try and trail the price as close as possible.
CCI divergence strategy Pros & Cons
Pros
- Can be used in ranging and trending markets
- Can spot some big moves at the beginning
- Can be combined with other forms of chart analysis
- Can be used on any currency pair and chart timeframe
- CCI indicator is free to use and settings can be adjusted
Cons
- Requires additional confirmation
- Not the easiest way to trade with the CCI
- Often overlooked by uninformed traders
- Take time to learn how to correctly spot divergence
Conclusion: is the CCI divergence strategy worth trying?
Yes, using CCI divergence can be an effective addition to your forex trading strategy, especially when combined with other leading forex indicators such as moving averages or MACD to find market trends and gauge momentum. I personally would not trade with CCI divergence on its own, but would use it as an additional filter to confirm entry and exit points in the market.
As with any forex strategy, the results you see trading CCI divergence can be highly dependant on your money management. I would try to cut losing trades short and let winning trades run. I would always want to shoot for a positive risk to reward ratio so that one bad trade does not wipe out a run of winners.
You could always try the CCI divergence strategy on a demo account to begin with. You can get a free demo account from most forex brokers. This will enable you to practice your trading strategies risk free so that you could build confidence and improve your trading skills. If and when you feel ready, you could make the switch over to a real live trading account.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
