Here, we have represented a bearish divergence in the CCI indicator. As you can see, the Commodity Channel Index indicator made two peaks, but the previous was higher than the latter, while the price did not accompanied the move. We have marked the bullish signals with green arrows and the bearish signals with red arrows inside the CCI indicator in the previous graph. The easiest way to use the CCI indicator is by using the overbought and the oversold strategies, just like the stochastic. In this case, the CCI indicator is not bounded between, so we will consider a high value (more than 100) to be an overbought zone.
Thus, when the indicator is higher than +100, it is considered to be a buy signal since the market is beginning to be on an uptrend. Conversely, if the indicator shows values below the -100 it is thought to be the beginning of a strong downtrend, and sell signals are generated. Much higher or lower prices, such as -200 or +200, can be applied depending on the volatility of the asset. The MACD is another type of momentum indicator popular in the trading world due to its high accuracy and effectiveness. It is a more complex tool that uses the Moving Average (MA) to find the momentum and trend direction of an asset.
In this selection, a value emerges by calculating the 20-period high and low closings and the typical price. From Forex markets to the world of digital money, it is used together with indicators in a wide range of investment markets, either single or binary. The advantage of this Forex trading strategy is that it is safer for your capital.
CCI indicator – ending remarks
While the Stochastic oscillator is limited to a range of values between 0 and 100, the CCI values are in an unlimited range. They will also give different signals in overbought or oversold due to differences in the way they are calculated. As in the RSI example, using Stochastic in comparison with CCI will allow you to make more accurate investment decisions.
This can have a significant effect on the behavior of the indicator. Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the most profitable trading strategies 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!
The CCI structure is more likely to detect short-term trend changes. This oscillator also gives significant signals to detect over-buying and over-selling regions, resulting in more successful horizontal markets. The main objective of this indicator is to determine overbuying and selling levels. The first goal is to determine the tendencies of investment assets, but today there is a very broad range of use. + On the contrary, the price is trending down (the next trough is lower than the previous one) but CCI is increasing.
Lambert set the constant at 0.015 for scaling purposes, so that roughly 70% to 80% of CCI values would fall between −100 and +100. You multiply the constant and the mean deviation so that the outcome is readable. Technical analysts use the CCI to spot different harmonic patterns in price fluctuations that help to determine the entry and exit points when trading. As we already know, the oscillator consists of an indicator line, which moves between two zones – overbought (level above 100) and oversold (level below -100). The CCI, or Commodity Channel Index, was developed by Donald Lambert, a technical analyst who originally published the indicator in Commodities magazine (now Futures) in 1980. Despite its name, the CCI can be used in any market and is not just for commodities.
CCI indicator is shown on charts as a moving average line
As a momentum indicator, it fluctuates over and under the zero line and there is no limit on its upward or downward value. However, the values of 100 and -100 are considered to be key levels. The CCI can be adjusted to the timeframe of the market traded on by changing the averaging period. There are also divergences—when the price is moving in the opposite direction of the indicator. If the price is rising and the CCI is falling, this can indicate a weakness in the trend. This way, they can tighten stop loss levels or hold off on taking new trades in the price trend direction.
One of the main differences is that the Stochastic Oscillator is bound between zero and 100, while the CCI is unbounded. Typically, when we decide to use the CCI indicator, the standard format uses 20 periods for the moving average. It is a momentum-based https://bigbostrade.com/ oscillator that will help us to determine the state of the asset we are dealing with. Note that, because daily charts are so volatile, its important to exit your position once the CCI value moves above +100, before it dips again.
CCI is a very well-known and widely-used indicator that has gained level of popularity in no small part of its versatility. Besides overbought/oversold levels, CCI is often used to find reversals as well as divergences. Originally, the indicator was designed to be used for identifying trends in commodities, however it is now used in a wide range of financial instruments. Traders and investors use the commodity channel index to help identify price reversals, price extremes and trend strength.
How CCI indicator works?
If the CCI signal line goes above or below this level, it indicates overbought and oversold levels. Next, you calculate a simple moving average of the typical price for the number of periods specified. As with most oscillators, divergences between the indicator and the actual price action an also be applied to increase the strength of signals. Since Lambert’s original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals. For scaling purposes, Lambert set the constant at 0.015 to ensure that approximately 70 to 80 percent of CCI values would fall between −100 and +100.
This is when the indicator is moving in the opposite direction to the price. When the indicator is rising and the price is falling, it may indicate the weakening of the downtrend. But if the indicator is falling with rising price, the uptrend is losing momentum and a reversal may be likely. Divergence may not be an accurate reversal signal but it should still be considered a warning sign that market conditions may change.
- Using a daily or weekly chart is recommended for long-term traders, while short-term traders can apply the indicator to an hourly chart or even a one-minute chart.
- They also assist investors to spot overbought and oversold levels in the market.
- It is very popular amongst traders to combine the CCI indicator with the Fibonacci Retracement since they are both advanced trading tools.
It is a momentum oscillator that is used to identify extreme conditions in the market. Its readings are relatively high when prices are far above their average and relatively low when prices are far below their average. Extreme values may indicate overbought/oversold conditions in the market. The CCI (Commodity Channel Index) is a technical indicator that measures the current price level of a security relative to an average price level over a given period. It is a momentum oscillator that is used to identify extreme conditions, such as oversold and overbought conditions, in the market.
The commodity channel index forecasts when a market cyclical reversal is likely. One of the fundamental theories of the CCI is that market moves in cycles, with peaks and troughs coming at time intervals. Therefore, as with most momentum based oscillators, divergence between price and the indicator’s reading should not be ignored. Divergences between CCI and price action can be a signal that changes in trend may be forthcoming. The CCI is categorized as a momentum oscillator, which means that CCI is used to identify overbought and oversold levels. Technical analysis focuses on market action — specifically, volume and price.
Meanwhile, for other instruments, you might have to switch to -250 and +300, for example. 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. The primary type of trading signal that this indicator gives is the exit of the line into critical oversold and overbought zones. 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.
quiz: Fibonacci levels
The Commodity Channel Index indicator can be useful when trading forex to identify whether a currency pair is overbought or oversold over a specific period. Additionally, you can use the indicator to spot the strength or weakness of the trend in the market traded. The longer the period chosen (the more bars in the calculation), the less often the indicator will move outside -100 or +100.
The key element of its functionality is that it helps traders to find the latest price reversal zones. Another possible combination can be done between the CCI and on-balance volume (OBV). The latter is an indicator that monitors the accumulation and distribution periods of a trend.
Since it was invented, the CCI calculation has been added as an indicator to many charting applications, eliminating the need (thankfully) to do the calculations manually. Most of these charting applications simply require you to input the time interval that you would like to use. Here we can see that one cycle (from high to high) starts at Sept. 11 and finishes on Jan. 29. This represents roughly 140 trading days, which, divided by three, gives a time interval of about 47.
Your actual trading may result in losses as no trading system is guaranteed. If you are looking to trade forex online, you will need an account with a forex broker. If you are looking for some inspiration, please feel free to browse my best forex brokers. IC Markets are my top choice as I find they have tight spreads, low commission fees, quick execution speeds and excellent customer support. Below is presented a chart of the Alcoa share that includes the MACD and CCI indicators. Below follows a chart that demonstrates the Stochastic and the CCI indicators of the AirBNB share.
You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. There are different day trading strategies that you can use to take your position, including scalping, money flows, mean reversion, swing and trend trading. The second type of signal, which gives the indicator, is less obvious but can also be used in trading – it is the divergence of the indicator movement and the price chart. The calculation resembles the calculation of the average deviation in statistical analysis. The word commodity in the indicator’s name might seem to apply only to the analysis of commodities, such as oil or gold.
It is extremely important, as with many trading tools, to use the CCI with other indicators. Pivot points work well with the CCI because both methods attempt to find turning points. Entry and exit rules on the shorter timeframe can also be adjusted.