CCI Forex Indicator Overview
The Commodity Channel Index, also abbreviated to CCI, is a momentum based oscillator that compares the mean price with the average mean price over a typical window of 20 periods. Despite its name, the CCI may be used in any market and is not limited to commodities. Usually, the CCI indicator helps traders to determine when a currency pair is nearing a condition of being overbought or oversold.
Forex Trading Strategy Overview
This technical indicator was developed by Donald Lambert to analyse price trend’s direction and strength. This allows a trader to decide if they want to enter or exit a trade, hold back from taking a trade, or add to an already existing position. This allows the indicator to be used in order to provide trade signals.
The commodity channel index is popular for spotting new trends, analysing overbought and oversold currencies, and spotting any weaknesses in trends when the indicator diverges with the price.
Spotting New Forex Trends
When analysing a currency pair, the CCI indicator may be used on the chart to indicate a new uptrend. This is evident when the CCI indicator moves from negative or near-zero territory to above 100. If this occurs, a trader can use this opportunity to watch for a pullback in price, which is then followed by a rally in both price and the CCI to indicate an opportunity to buy.
The same concept can be applied to spot a downtrend of a currency pair. If the CCI indicator goes from positive or near-zero readings to below -100, then a downtrend could be occurring. This can indicate to a trader that it is time to get out of longs, or begin watching for shorting opportunities.
Analysis of Overbought or Oversold Currencies
Overbought and oversold currencies are not fixed since the indicator is unbound. This allows a trader to look past readings on the indicator to get a sense of where the currency price may have reversed. For one currency pair, a reversal could occur around the +200 or -150. While another could occur near the +325 or -350. Zooming out of the chart in order to see lots of price reversal points and the CCI readings at those times.
A divergence will occur when the price is moving in the opposite direction of the CCI indicator. If a currency price is increasing and the CCI is dropping, this would indicate to a trader that there is weakness in the trend. Since it can last a long time and it doesn't always bring forth a price reversal, divergence is seen as a poor trading signal. However, it is useful in indicating to a trader that there is a chance of a price reversal occurring. Divergence can also aid the trader in reinforcing stop loss levels or refraining from taking new trades in the currency trend direction.