Commodities Chanel Indicator or CCI for short is a momentum-based indicator that indicates the state of an asset.
Using this indicator, traders can receive information if an asset is overbought or oversold and based on this information plan their trading strategy.
CCI indicator overview
CCI being a commodities indicator does not mean that it can only be used in the commodities market. It became popular in every market, and we can use the CCI indicator for Forex trading as well. This indicator measures trends strength and direction. With this indicator, we can see if an asset is overbought or oversold and act accordingly.
- Indicator type: Lagging indicator
- Best timeframe to use: 20-period
- Goes best with: Pivot Point
- Placed on: Below the chart
Technical details of CCI indicator
CCI is a simple indicator to use, and new traders should have no problem implementing it into their trading activities. For starters, this indicator is placed below the chart, which makes it easier for new traders to understand and read charts, as there are not too many complicated moving parts placed on top of the chart. When it comes to calculating CCI, it might seem a bit complicated at first, but once you take a closer look, it becomes much easier to get the hang of.
How to calculate CCI indicator
As we mentioned, calculating CCI might seem complex at first glance, but in reality, it is not anything like that. When calculating CCI, we simply need to look at the high, low, and closing prices of an asset, and once we have these we will need to use a few formulas to calculate the FX CCI indicator. These formulas are as follows:
CCI = Typical Price – MA / Mean Deviation x .015
Where
Typical Price = High + Low + Close / 3
MA = Typical Price / P
MD = |Typical Price – MA| / P
P = Number Of Periods
Even after learning how to calculate CCI, if you think that it is too hard, fear not, as most trading software such as MetaTrader5 comes already equipped with a CCI indicator. All you need to do is simply place it on the chart.
What does CCI tell us?
Forex CCI indicator tells traders about ongoing trends and trends that are about to start. This is done by looking if an asset is overbought or oversold, and this is displayed below the chart in the form of a line chart. This CCI chart then consists of three lines, the 0 line, the 100 line, and the -100 line. When the price goes over 100 it signals that the asset is overbought, and we have an uptrend, while when it falls below -100 it signals that the asset is oversold, and we are in a potential downtrend. This information is then analyzed along with information provided by other indicators, and traders act accordingly.
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Practical application of CCI indicator
As we mentioned above, using the CCI indicator at first might seem complicated if we just look at the formula, but the idea behind this indicator is very simple, and even new traders can implement it into their trading. Being placed below the chart as a sort of separate chart makes it a really simple indicator to read and understand, as with this, the chart is not overloaded with a bunch of moving lines. This becomes more understandable when we consider that it is likely that the trader also uses other indicators, so the fewer moving pieces are placed on the chart, the easier it is to read that chart. When it comes to trading with CCI indicators there are different strategies that implement CCI and here we will present you with a CCI indicator example and strategy that every trader can follow.
Basic CCI trading strategy
This is a simple strategy that every trader can use, especially beginner traders. In this case, traders are simply watching the movement of the CCI indicator relatively to 100 and -100. If CCI goes over 100 it signals an uptrend and traders should enter long positions. When it falls below -100 it signals that the asset is oversold and a downtrend has begun and traders should short an asset. When using this simple strategy, we should look at the historical data of an asset and see reversal points on CCI. What we mean by that is when an asset goes over 100 and is overbought, it will slowly slow down and will reverse. When looking at the historical data, we should check around which mark these reversals happen, as some asset might reverse when it reaches 200 CCI, while some assets can usually go up to even 350 before they reverse. For better visualization, let’s take a look at the example of this CCI indicator for Forex traders.
In this example, we are trading with EUR/USD trading pair. Looking at the CCI chart, we see that it broke the 100 line, and at the same time prices started to rise. When this happened, we entered the market and kept our position open until CCI fell below the 100 line. After this we continued to watch the market, and we had one more big breakout and CCI broke the 100 line. Once again, we entered the market and kept the position open until CCI started to fall down. This should showcase how easy it is to use this strategy. Keep in mind that it is always best to use Forex trading CCI indicator in combination with other additional indicators such as Pivot Points, as this increases the accuracy of each indicator and probability of making good profits rises.
History and other useful details of CCI indicator
CCI indicator was developed by Donald Lampers in 1980 for the commodities market. It soon became one of the most popular indicators for commodities trading, but it soon after found its footing in other markets. Nowadays CCI indicator is used in almost every market such as Forex, Stocks, Futures, and even crypto. It is an oscillator, meaning that it varies over time between or above certain lines, in CCI’s case it’s 100 and -100 lines.
FAQs on CCI indicator
What are the limitations of CCI indicator?
CCI indicator is unbound, meaning that prior overbought and oversold levels might have very small impact in the future. Also, being a lagging indicator means that the information received from it might already be outdated.
Can CCI indicator be useful for fx traders?
Absolutely. CCI indicator was first developed for commodities trading, but ever since then it has been adopted into practically every financial market, Forex included.
Is it worth trying trading with CCI indicator?
Yes, the CCI indicator is a simple and reliable indicator to use for your everyday trading. But, being a lagging indicator means that it is better to use it in combination with other indicators such as Pivot Points in order to increase the effectiveness and accuracy of the received signals.
