The CCI and stochastic oscillator are both good forex indicators for when it comes to finding overbought and oversold market conditions. In addition, CCI divergence and the stochastic crossover can help to show us the direction in which a currency pair is moving. When we combine these indicators together, we can help to remove some of the false signals that they generate when used along and give our strategies that extra each which can make a big difference on results. In this guide I will look at a simple CCI and stochastic strategy that you can use to analyse all of your favourite currency pair charts and timeframes to find actionable forex signals.
What is the CCI?
The commodity channel index (CCI) indicator, is an oscillator that was developed by Donald Lambert in the 1980’s. It compares the current price with an average price, typically over 14 periods. As an oscillator, it is a handy tool to highlight overbought and oversold areas, and it can also help to identify bottoms and peaks in a trend.
The main way in which the CCI is used in forex trading, is the CCI crossover strategy. When the CCI is above the 100 level, the market is considered overbought and we might start looking for a sell trade. If the CCI was below the -100 level, the market could be oversold and we might instead look to take a buy trade.
However, trading with the CCI on its own can cause lots of false signals. This is why we implement another technical indicator such as the stochastic oscillator for further confirmation on our trades. I also keep an eye on price action and candlestick patterns to confirm entries as I find this help to filter some bad trades.
What is the stochastic oscillator?
The stochastic oscillator is an indicator that compares the most recent closing price of a currency pair to the highest and lowest prices during a specified period of time. It gives readings that move (oscillate) between zero and 100 to provide an indication of the currency pairs momentum.
The most common way forex traders use this indicator is the stochastic crossover strategy. This is when the stochastic main line crosses above or below the stochastic signal line. If the crossover happens in an extreme zone above 80 or below 20, it is considered a strong signal that the market may be reversing into a new trend.
As with the CCI, the stochastic indicator can give lots of false signals when used on its own. Hence, by combing it with the CCI and price action analysis, we can confirm all of the stochastic buy or sell signals before taking a position.
How to trade the CCI Stochastic strategy?
We will combine the entry signals of both indicators and take a look at how price is reacting around key support and resistance levels. If the CCI is overbought or oversold, we will then check to see if the stochastic oscillator is also near an extreme zone. Once that has been confirmed, we can then use the stochastic crossover to time or entry.
- CCI (14) is around the oversold zone (-100)
- Stochastic (5, 3, 3) is around the oversold zone (20)
- Stochastic (5, 3, 3) main line crossing above signal line
- Price bouncing from support or breaching resistance
- Bullish price action
In the USD/JPY 1-hour chart below, you can see that all of the conditions for a CCI and stochastic buy trade have been met. The CCI is oversold as is the stochastic. The stochastic main line has crossed above the signal line suggesting an uptrend is gathering some momentum. We can see price has formed a level of support and there is a bullish hammer candlestick pattern confirming the trade. The stop loss could have been just below the support level which is only around 15 pips. This uptrend continued for over 400 pips which gives a very favourable risk to reward ratio on this trade. See if you can spot the additional stochastic and CCI entries that occurred during this uptrend. Awe could have waited to take one of the other entries but it is nice to catch a big move from the very start.
- CCI (14) is around the overbought zone (100)
- Stochastic (5, 3, 3) is around the overbought zone (80)
- Stochastic (5, 3, 3) main line crossing below signal line
- Price bouncing from resistance or breaching support
- Bearish price action
In the USD/JPY 1-hour chart below you can see that all of the conditions for a stochastic and CCI sell trade have been met. The CCI is in the overbought zone above 100 whilst the stochastic main line is crossing the signal line downwards. The stochastic is not far from its overbought zone and price has bounced away from a recent resistance level. These are all bearish signals which are confirmed with a hanging man candlestick pattern. The stop loss could have gone just above the resistance level at around 20 pips. This downtrend continued for almost 600 pips which gave us ample opportunities to take profits along the way.
CCI stochastic strategy Pros & Cons
- Can catch some big currency pair trends
- Can be used to time entry and exit
- Additional confirmation on trades
- Actionable buy and sell signals
- Any currency pair and chart timeframe
- CCI and stochastic indicators free to use
- There will still be false signals
- Requires some user initiative
- Takes time to master
- Needs good money management
- Requires trader to be disciplined
CCI vs Stochastic
The CCI and stochastic oscillator are very good technical indicators in their own right, both showing possibly overbought and oversold market conditions in their respective extreme zones. I prefer the stochastic indicator myself as I find that price can continue trending even in the CCI extreme zone. Whilst that remains true with the stochastic, we can use a stochastic crossover in the extreme zone for extra confirmation.
Conclusion: is the CCI and stochastic strategy any good?
Yes, as you can see from the trade examples that I have shared on this page, trading forex with the CCI and stochastic strategy can provide some good signals. However, there can be a lot of false signals if you were to take them blindly. I find the strategy works best when confirming each buy and sell signal with price action analysis.
As with any forex system, performance can depend greatly on the stop loss and take profit that you use. You should have good forex money management and ideally a favourable risk to reward ratio. It can be vey frustrating to see a run of winning trades wiped out by one bad trade. I would be looking to cut losing trades short and let my winners run by locking in the trade at break even point and using a trailing stop to maximise each move.
If you think that the CCI and stochastic strategy is something that you would like to try, you could always test it out on a demo account to see how things go. You can get a free forex demo account from most forex brokers, including IC Markets who have tight spreads and low fees for trading forex. I would always practice any forex strategy on demo at first in order to understand how it works and see if it produces good results before making any commitment.
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.