From there, traders expect a retrace in price and often look for reversal trades. 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. 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.
It is much more volatile than the denominator and therefore has a bigger effect on the CCI. Which makes sense, because the numerator is the deviation for one day, not the average of many days. Martin Pring’s Technical Analysis Explained presents the basics of momentum indicators by covering divergences, crossovers, and other signals. The chart below shows United Parcel Service (UPS) with 40-day CCI.
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How to Use the Commodity Channel Index (CCI) Indicator in Trading
- 70-80% of the CCI values fall within the +1—to -100 range because of the 0.015 constant.
- A bullish divergence occurs when the underlying security makes a lower low and CCI forms a higher low, which shows less downside momentum.
- This difference is then compared to the average difference over the time period.
So, we go one step forward to find an entry signal day trading with the CCI. Let’s examine 3 reasons why traders should start using the CCI indicator. The reason why the CCI formula uses a constant of 0.015 is to ensure that the CCI value would not fall between -100 and +100 Cci indicator that often. But, of course, that the CCI values are dependent of other variables such as the look-back period.
CCI Indicator Settings
Figure 5 illustrates how the forex CCI indicator is used when the markets are moving sideways. This signals that the momentum is fading and therefore we can expect price to fall. Generally, lower lows or higher highs (or higher lows and lower highs) in price should reflect in the CCI posting the same values. When there is a discrepancy when comparing the highs and lows, you can expect the cci divergence to result in a price correction. Now, just because we have divergence between the price and the CCI it’s still not enough for us to risk our money on this trade.
Step #2: Wait for a retracement and make sure that during that retracement the CCI indicator holds above the zero line.
Integrating multiple tools can create a more comprehensive trading strategy, reducing the chances of false signals and improving overall performance. That is why you should only invest money that you are prepared — or can afford — to lose at such high risks. Tradersunion.com does not provide any financial services, including investment or financial advisory services. Also, the Traders Union is not a broker and does not get money for trading in the Forex or CFD markets. Traders speculate on whether one currency will rise or fall in value relative to another currency and make trading decisions accordingly. However, beware that trading carries risks, and you can lose your whole capital.
Much is written about the best way to trade the Commodity Channel Index, but my testing shows only one profitable strategy. The proven way to trade the CCI indicator is to buy when it moves above -100 after dipping below it and sell when it moves back below +100 after rising above it. One should also note that every technical tool has its disadvantages. The Commodity Channel Index is a valuable technical indicator when used with conjunction of other technical tools.
For swing traders, using a moderate period setting helps smooth out the noise, allowing you to focus on more sustained trends. This balance reduces the risk of getting whipsawed by minor price fluctuations while still catching significant moves. That’s why so many traders use the CCI indicator to spot trends, find the best time to buy and sell and predict market reversals before they happen. If CCI is above +100, the market might be overbought, which could lead to a price correction. Conversely, if CCI falls below -100, it may indicate an oversold market and potential buying opportunities. Therefore, this use case can help traders time entries and exits more effectively.
With the four components of the CCI indicator calculation now known – we can get our CCI number for the day. The time period to be used in calculating the SMA portion of the CCI (20 is the default). When price crosses above the overbought threshold, a fall in price may occur soon afterwards.
How to use the CCI indicator effectively
Technically, CCI favors the bulls when positive and the bears when negative. However, using simple zero-line crossovers can result in many whipsaws. Although entry points will lag more, requiring a move above +100 for a bullish signal and a move below -100 for a bearish signal reduces whipsaws.
The Commodity Channel Index crossovers above +100 or below -100 indicates potential trend changes or overbought/oversold conditions. While in the case of Stochastic Oscillator, crossovers of the %K and %D lines above 80 or below 20 are used commonly for identifying overbought and oversold conditions. Though no indicator can provide accurate signals, traders measure in terms of precision. This precise tool can be used as signal and further multi time frame analysis and other indicators can be used in conjunction to further improve the accuracy of the prediction. The 5-period simple moving average of the typical price will, of course, be $24.00.
When the indicator is above +100, the price is above its average. When the CCI is below -100, its price is below the historical average. The CCI indicator is a powerful tool that helps traders identify trends, reversals, and overbought/oversold conditions. While it works well on its own, combining it with other indicators increases accuracy. The CCI indicator is a versatile and powerful tool for traders looking to identify market trends and reversals. By understanding its formula, customizing settings, and following best practices, you can make more informed trading decisions.
Here are 3 of the most common mistakes traders make while using CCI. Regardless of its effectiveness, it is important to consider that the CCI is not a standalone indicator. Traders should use the CCI with additional technical indicators to improve the effectiveness of their trades. It means that the Typical Price is not really affecting the 20 Period Mean Dev since it is close to the 20 Period SMA. But…as the Typical Price moves away from the 20 Period SMA (either up or down) the 20 Period Mean Dev is going to increase – because the mean deviation from the SMA is increasing.
Instead of buying at the top or selling at the bottom, which usually happens with most traders, the CCI index can signal to you when the best time is to enter a trend. Using the CCI as a trend indicator is ideal when combined with other trend indicators such as moving averages. This can help you to pick bottoms in a rally or tops in a decline. In other words, using the cci as a trend indicator, you can time your entries within a trend. You will also learn how to properly read the technical signals from the forex cci indicator. Last but not least, you will know how to apply this knowledge and how to improve your technical analysis when using the commodity channel index indicator.
Works in a variety of markets
There are very few technical analysis indicators better than the Commodity Channel Index. Money Flow Index is a very profitable indicator, also Heikin Ashi charts, combined with the rate of change, RSI, and bullish chart patterns. Our testing has proven these indicators to be equally effective, work on many timeframes, and are successful in trading strategies. If CCI resonates sharply around 0 level with no precise direction, the trend is likely to be interpreted as range bound and trades can be avoided. If CCI strongly rejects and bounces from oversold or overbought regions, necessary steps can be taken to take complimentary trades based on other readings.
The divergence between the price of an asset and the CCI indicator can be a powerful tool for predicting trend reversals. Divergence occurs when the price makes a new high or low, but the CCI does not follow suit. In strong trends, the CCI might remain in the overbought or oversold territory for an extended period, which can lead to premature buy or sell signals. While no universal setting fits every market, many traders use a 14-period- or 20-period setting for a balanced approach. Shorter periods make the indicator more responsive to price changes, whereas longer periods reduce volatility and noise.