CCI and Moving Average Strategy

The CCI and moving average are popular forex trading indicators that are good in their own right. However, you can improve the buy or sell signals that they generate by combining them together. This will help to better time your entry into the market and filter out some false signals. In this guide I will look at a simple CCI and moving average strategy that you can use to analyse currency pair charts and find trading signals.

What is the CCI?

The Commodity Channel Index (CCI) is a technical indicator that can help traders spot overbought and oversold market conditions for trading CCI crossovers. When the CCI is above 100, this can signal an overbought market that may start to fall. When the CCI is below -100, this can be a sign of an oversold market that may start to rise again. You can also use CCI divergence to identify trend direction and momentum.

The CCI indicator can give lots of false signals if used on its own. You will often see price reach the extreme levels but continue in that same direction for quite some time before there is a reversal. This is why we combine the cci and the moving average along with other technical indicators and price action analysis to time our entry.

What is the moving average?

The moving average is one of the most widely used technical indicators. It is used to see if the market is trending upwards or downwards. When price is above the moving average, it is seen as a bull market. When price is below the moving average, it is seen as a bear market.

However, when the market is ranging, price can jump across either side of the market which could cause lots of false signals. This is why it is good to combine the moving average and CCI, or use double moving average crossovers for confirmation of the trend direction.

How to trade the CCI moving average strategy?

The CCI and moving average strategy combines both of the indicators to discover potential buy and sell trades on currency pairs. When all of the indicator conditions agree, we will look to enter the market. We can confirm our entry with candlestick patterns and also keep an eye on how price reacts around support and resistance levels.

You can use this cci and moving average strategy on any chart timeframe or currency pair. I personally prefer the 1-hour charts and above as they tend to have less noise when compared to the lower chart timeframes. It also means less time spent watching the charts.

I like to trade major currency pairs such as the EUR/USD and GBP/USD as they usually have lots of liquidity which means we can catch some good market moves and place trades with tight spreads and quick execution speeds. This is especially the case when using an ECN forex brokers such as IC Markets.

Buy signal

  • SMA 50 is above SMA 200
  • CCI is oversold below -100
  • CCI is showing divergence to the buy side
  • Price is breaching resistance or bouncing from support
  • Bullish candlestick patterns

You can see in the USD/JPY 1-hour chart below that all of the conditions for a buy trade have been met. The 50 SMA is above the 200 SMA, which is known as the golden cross and is a strong sign that we are in a bullish market. The CCI is in the oversold extreme zone below -100 and showing divergence to the upside. The recent resistance level was breached and has since become a support level that has been tested a few times and held up well. The entry is confirmed with a hammer candlestick pattern followed by an engulfing bar, both bullish signals. The stop loss could have been placed just below the support level and 50 SMA, which is around 20 pips. This uptrend continued for around 630 pips which would have been a great buy trade. The 50 SMA could have been used as a trailing stop but may have taken the trade out around half way up. I would have at least wanted to lock the trade in at break even point and take some profit along the way. It can be very frustrating to see a good trade turn into a bad one through greed and/or poor money management.

CCI Moving Average Strategy Buy Signal
CCI Moving Average Strategy Buy Signal

Sell signal

  • SMA 50 is below SMA 200
  • CCI is overbought above 100
  • CCI is showing divergence to the sell side
  • Price is breaching support or bouncing from resistance
  • Bearish candlestick patterns

In the USD/JPY 1-hour chart below, you will see that the 50 moving average is below the 200 moving average. This is an important crossover known as the death cross. It is a strong indicator of a bearish forex market. The CCI is showing downwards divergence and is in the overbought zone, suggesting buyers are running out of steam. We can see price bounces from the recent resistance level and then has a steep decline downwards, confirmed by a shooting star candlestick pattern. The stop loss could have been placed just above the 200 SMA, which would have been around 20 pips. When you consider this downtrend continued for around 580 pips, there was plenty of opportunity to take profit on the way down.

CCI Moving Average Strategy Sell Signal
CCI Moving Average Strategy Sell Signal

CCI moving average strategy Pros & Cons

Pros

  • Catch some big trends from the start
  • Can spot ranging and trending markets
  • Helps to filter false signals
  • Any currency pair or timeframe
  • CCI and SMA are free to use

Cons

  • Requires good timing for entry/exit
  • Need sensible money management
  • There will still be false signals

Conclusion: does trading forex with the CCI and moving average work?

Yes, these are 2 very powerful indicators when you know how to use all of the different elements of them, from moving average crossovers to CCI divergence. I still wouldn’t use them on their own without further chart analysis to help filter bad trades and time my entry into the market. Even then, there will still be false signals which is why good money management is so important.

If you like the look of the moving average and CCI strategy, you could always give it a try on a demo account to see how it goes. You can get a free forex demo account from most forex brokers. I would always practice any forex strategy on demo at first in order to understand how it works and see if it produces the desired results before making any commitment.

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