Commodity Channel Index (CCI) is a technical tool that helps in determining when a currency will be oversold or overbought. This tool was developed by Donald Lambert during 1980, where he quantified a basic relationship between the moving average (MA) of the asset's price, the present asset's price and its deviation (D).
The formula is represented as:
CCI= Typical Price - MA / 0.015 X D
Earlier, this oscillator was used to spot only long-term trends, while now it can be implemented within any timeframes.
How To Use Commodity Channel Index (CCI) Indicator?
The CCI performs a comparison of the average price and current price, indicating a lot of weakness and strength that might occur in the price movement. A CCI with 30 to 40 period is commonly used for this process.
A period here denotes the total number of price bars the indicator will use for evaluation. This price bar can be five-minute, daily, monthly and weekly or any other stipulated timeframe that is present on the charts. The longer will be the period, the chances of indicator moving -100 to +100 (signal lines) will be reduced. This is the reason why weekly or daily charts are ideal for long-term forex traders, while short-term traders can make the most of one minute or hourly chart. The calculation of CCI is done automatically by the trading platform, where the traders only have to place their input setting along with the period you wish to choose within the particular timeframe. A good practice is to just add the CCI indicator to your charts and try which settings of the CCI indicator will suit your requirements.
When the CCI moves above +100 then the measure is above the MA price and if its below -100 then the price is below MA. As soon as +100 level of the CCI indicator is crossed from upside to down, possible bearish signal is triggered. And if the CCI line crosses -100 level of the indicator from downside to up, possible bullish signal is triggered.
Another way to trade CCI is called divergences. A divergence happens when there are two higher highs of a market, but the CCI indicator starts moving down (the second high of the indicator is lower). This is called a bearish divergence. Bullish divergence is valid if there are two lower lows of a currency, but the second low of the indicator is higher than the previous low of the indicator.
Benefits of Commodity Channel Index (CCI)
Commodity channel index is a versatile tool that produces a wide range of sell and buy signals as
It has the ability to identify momentum and thus provides confirmation about emerging trends or possible diversions.
Remember, CCI is not a standalone tool and hence to improve its effectiveness it should be used along with another tools of technical analysis.
When CCI is combined along with distribution/accumulation line traders can get a detailed in-sight about the upcoming fluctuations.
Traders can cover their buy or sell currencies when CCI is at its peak or perform additional orders when its value lowers.
Alternatively, you can also use our highly powerful and improved CCI based indicator that you can download for free at the FX Trading Revolution website.
High Risk Warning: Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.
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