RSI and CCI Strategy

The RSI and CCI are both technical indicators that can be used to identify overbought and oversold market conditions. Many forex traders will use one or the other, simply because they serve a similar purpose. However, if you combine them both, then you can get extra confirmation on your trades which can help to filter out some false signals. If you also use RSI divergence and CCI divergence, the indicators can also be used to spot the trend direction and momentum. This is an aspect that is often overlooked by traders who think they are simply indicators for spotting extreme market conditions. In this guide I will look at a simple RSI and CCI strategy that you can use to analyse all of your favourite currency pair charts and timeframes to find actionable forex signals.

What is the RSI?

The relative strength index (RSI) indicator is a momentum indicator used in technical analysis that measures the speed of price changes in a currency pair. It provides traders with signals about bullish and bearish price momentum and is typically plotted under the forex charts.

When the RSI is above the 70 level, the market is considered to be overbought and we might look for an RSI reversal trade to the downside. Likewise, when the RSI falls below the 30 level, the market may be oversold and we might consider a buy trade.

However, the market can still continue rising or falling even in these extreme zones which is why it is important to combine the RSI with other indicators such as the CCI for additional confirmation.

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. Just like the RSI, it is commonly used to spot extreme market conditions for trading a CCI crossover strategy.

When the CCI is above the 100 level the market could be overbought and we might be expecting a reversal to the downside. On the other hand, if the CCI is below the -100 level, the market may be oversold and we might expect price to reverse upwards.

Again, I would not trade the CCI signals blindly without additional confirmation from other technical indicators such as the RSI. I would also be keeping a close eye on price action and look out for how price reacts around key support and resistance levels.

How to trade the RSI and CCI strategy?

To get the best out of both of both of these indicators, we will combine all of the key elements of each to look for buy and sell signals where they all agree. We want both the RSI and CCI to be in or around the overbought and oversold zones, ideally with some divergence in the direction we are looking to trade. Each entry can be confirmed with bullish or bearish price action, including candlestick patterns.

You can use this RSI and CCI 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 but therefore less trading signals. You can also use multiple timeframe analysis to confirm trades over the short and long-term.

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

  • RSI (14) is below the 30 level
  • CCI (14) is below the -100 level
  • Price is bouncing from support or breaching resistance
  • Upwards divergence (optional)
  • Bullish price action

In the GBP/USD 1-hour chart below, you can see that all of the conditions have been met for a buy trade that managed to catch a big move to the upside. The RSI and CCI were both oversold and the price bouncing from a key support level. There is bullish price action which you cannot see as the chart is zoomed out to show all of the uptrend, but this includes multiple hammer candlestick patterns. Interestingly, a stop loss just below the support level at around 10 pips would have been sufficient. When you consider that this uptrend continued for at least 1,200 pips, there was ample chance to take profits along the way. You can see the RSI and CCI divergence confirming the continuation of the trend throughout. There are also additional entry signals when the RSI and CCI both crossed over their respective extreme levels again.

RSI CCI Strategy Buy Signal
RSI CCI Strategy Buy Signal

Sell signal

  • RSI (14) is above the 70 level
  • CCI (14) is above the 100 level
  • Price is bouncing from resistance or breaching support
  • Downwards divergence (optional)
  • Bearish price action

In the GBP/USD chart below, you can see that all of the conditions have been met for a sell trade. This caught another big trend which shows the power of the CCI and RSI strategy but also the importance of timing. We saw price was bouncing away from a resistance level and both the CCI and RSI were showing an extremely overbought market. There is bearish price action including a shooting star candlestick pattern that suggests sellers or beating the buyers and we will be seeing price move downwards as it does for over 1,900 pips over the course of 6 weeks. A stop loss just above the resistance level at around 20 pips would have been enough which gives this trade a very impressive risk to reward ratio. We could have locked the trade in at break even point and trailed the price downwards to maximise the move. You will also see there were additional opportunities to enter this trend when the CCI and RSI were extremely overbought again.

RSI CCI Strategy Sell Signal
RSI CCI Strategy Sell Signal

RSI and CCI strategy Pros & Cons

Pros

  • Catch some big market moves
  • Enter new trends at the start
  • Any currency pair and timeframe
  • CCI and RSI indicators are free to use
  • Easy to understand buy or sell signals

Cons

  • Requires additional confirmation
  • Will still be false signals
  • Need to time your entry and exit
  • Take some practice to master

RSI vs CCI

The RSI and CCI indicators can both spot extreme market conditions and trend direction with divergence. I find the CCI to be more sensitive to price data and therefore, it may give more frequent signals but this does mean the probability may not be as high compared to the RSI. You can use the both together for firm confirmation but even then, I would still use another trend based indicator and price action to time my entry.

Conclusion: is the RSI and CCI forex strategy any good?

Yes, I think the RSI and CCI are a great combination for spotting overbought and oversold market conditions where price might reverse. This means we can get into new trends from the start by buying low and selling high. However, price can continue in its original direction even when both the CCI and RSI are extreme. They also do similar things, which is why I think that it is important to implement other forms of market analysis before taking any trades.

As with all trading strategies, results can be highly dependent on your forex money management. I have seen the exact same forex strategy give a completely different set of results simply due to the traders have different stop loss and take profit levels. If your stop loss is too wide, it can wipe out a run of winning trades which means you need a really high win rate that is hard to achieve. If you have a tight stop loss, then you could cut losing trades short and bag more pips on good trades.

If you like the look of the RSI 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, 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 the desired results before making any commitment.

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