What Is The CCI & How To Trade With It

Some of the most experienced forex traders are constantly learning new techniques to help improve their trading knowledge and skills. Today we will talk about another useful oscillator – the Commodity Channel Index – CCI indicator. The Commodity Channel Index was created back in the 1980s by the famous trader Donald Lambert. The Commodity Channel Index (CCI) is calculated by determining the difference between the mean price of a security and the average of the means over the period chosen. This difference is compared to the average difference over the time period.

What is the CCI indicator?

The Commodity Channel Index (CCI) belongs to the category of oscillators; it can predict price change and fluctuation within a specific trading range.

The indicator is more suitable for working in the sideways channel, that is when there is no pronounced trend on the market, and the price is within a narrow range. CCI demonstrates both the classical oscillator signals and other signals that were laid down by its creator.

The advantage of such popular indicators is their availability. The Commodity Channel Index does not need to be downloaded or installed additionally. It is built into the base of classical instruments in accessible terminals like Metatrader 4 and 5, as well as in Live Chart. Just select from the list and click OK to place on your chart.

CCI indicator
CCI indicator

The algorithm is calculated on the basis of classical market laws. Namely – the cyclical nature of the market. Always a period of high prices is followed by a period of low prices, and so on. And these periods cyclically replace each other. If you know this, then you can gain an edge when trying to anticipate future price movements.

Many famous traders and professional analysts for many decades talked about the cyclical nature of the market. This theory has been well known for years. Even the renowned theory of Elliott Waves is based on the undulating and cyclical movement of the market. Why is it so important to determine the cycles in the market? This will allow us to understand when a new trend begins, and when the old one ends.

How to trade with the CCI?

The CCI is a universal oscillator that equally demonstrates performance in the foreign exchange market, commodities, stocks, cryptocurrency, etc. The market itself is not essential since the basis of the algorithm is the calculation of price fluctuations relative to the average value.

The author himself recommends using it in periods of 60 and 20 days. It was such time intervals that he set when he created it.

CCI indicator periods
CCI indicator periods

Creator Donald Lambert himself recommended using the daily timeframe for analysis. This is natural since in the 80s of the last century there were no convenient modern terminals that broadcast every second online, where you can even set a 1-minute timeframe. Everything was painted and calculated there, drawn by hand.

The more you set the period in the settings, the smoother the line will be, but the less and fewer signals will come. But their quality can sometime be considered better than lower periods which may generate more false signals.

It is able to work more precisely on the daily and hourly charts, as it was created specifically for such higher timeframes initially, and therefore took into account their features. However, just like the rest of the oscillators, the CCI can be used for medium or long-term analysis.

In the indicator window, you can simultaneously conduct graphical analysis, same as with RSI.

In the classical sense, oscillators have overbought and oversold zones. CCI, in contrast to them, has several levels, and is slightly different, each of which has its purpose.

Visually, it is a separate scale, which is located under the graph like all classic oscillators. The price range varies between -100 and +100. Most of the time, the price is midway between these critical levels. But sometimes it goes beyond its limits, thereby suggesting that the price may have reached overbought or oversold level.

The farther the price moves above +100, the higher is the likelihood that the uptrend will end, as there is an overbought condition on the asset. After all, the price cannot grow indefinitely. This should already be a signal to be ready that a moment of reversal will come soon.

It is similar with staying below the -100 zone when the downtrend is exhausting itself, and you need to be prepared and expect a trend to reverse from downtrend to upward.

Time frame selection

The more you set the period, less trading signals will be there but more false ones will be filtered. The probability of false signals is always present, so you need to minimize risks as much as possible. I would add additional technical, fundemental, price action and sentiment analysis to verify all CCI signals.

By decreasing the period, the line becomes smoother. And thanks to this, the number of trading signals will increase. But among them, there will likely be many false signals. Therefore, you need to configure the CCI settings according to your trading style or use additional indicators as additional filters.

CCI indicator forex strategy

The primary type of trading signal that this indicator gives is the exit of the line into critical oversold and overbought zones. As soon as the line crosses from -100 in the direction from the bottom up, traders may consider opening a buy order and when it reaches +100 from top to bottom, then they may consider opening a sell order.

CCI signals overbought oversold
CCI signals overbought oversold

But to receive more accurate signals, professional traders recommend using additional indicators and to make combinations of them that grow into successful trading strategies, while supplemented by money management and basic rules for following the psychology of trading.

Some online traders may even apply additional lines +/- 200, +/- 300 to the scale as well. If the price, for example, exceeded the level of +200, then this signals a state of very strong overbought. This means that the likelihood of an early trend reversal grows even more.

CCI signals 200 level
CCI signals 200 level

Such a strategy carries the following features:

About 70% of its time, the price moves within the range between +100 and -100 and this is the most crucial range to show a relatively calm market.

The following key areas are from 100 and 200 and from -100 to -200. The indicator is already entering these zones at sharper price impulses, that is, during strong jerks. Typically, such moments in the market are triggered by the release of important economic news and events, the start of an active European or American trading session after a sluggish Pacific and Asian.

Well, the fact that above +200 and below -200 is already the most extreme zones, which are achieved only in the rarest and most significant moments.

CCI divergence and convergence

These moments occur during discrepancies between the situation on the chart itself and the indicator. That is, the price is rising, and the CCI line is falling. And this is a robust signal that pros like. If this occurs on the market, it means that soon the price may unfold and move towards the direction of indicator.

CCI bearish divergence
CCI bearish divergence

CCI indicator conclusion

The commodity channel index (CCI) is an oscillator indicator that indicates overbought and oversold zones. It primarily helps in determining the potential trend reversal. We can use this indicator in many ways in our trading. The most common ways are to identify the overbought and oversold zones and trade them or find divergence in the indicator.

However, it is strongly recommended to use other indicators as filters to increase odds of success. Pivot points work well with the CCI because both methods attempt to find turning points. Some traders also add moving averages into the mix.

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If you are a fan of the CCI indicator, then you might want to take a look at the free CCI EA that I have developed. It can automatically analyse charts for buy and sell signals based on various CCI trading strategies.

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