The CCI or the Commodity Channel Index is a popular indicator offered by all trading platforms and it is being used to find out fake moves markets make in order to spot trend reversals.
On the Metatrader trading platform, the most popular trading platform, the CCI, appears under the Indicators/Oscillators tabs, and therefore it is going to be plotted at the lower side of the chart, below the actual price candles.
The default period offered is the 14, and this means that the CCI will actually take into consideration the previous 14 candles before plotting a new value. It can be changed with a higher or lower value, but it should be considered that a higher value means that the swings the oscillator is making are trending towards a horizontal line. As a consequence, it is recommended that the 14 period to be used.
Pushing the OK button will result in the indicator being plotted below the actual candles, as mentioned earlier:
Before moving forward, it should be mentioned that oscillators, or the technical indicators that are falling into this category, are being used to compare market swings with the indicator swings, if they are looking alike or they are different.
If they are different, in the sense that price may show a swing higher while the oscillator is not confirming that swing, it is always recommended to stay with the oscillator because of the fact that it is actually taking into account 14 candles rather than only one in the case of the actual price. This is being called a divergence.
There are multiple ways to trade with this indicator, and below I will list a couple of them:
– as shown in the chart above, the CCI travels between 100 and -100 as these are also default settings. But if you look at the indicator you’ll notice that quite often it is travelling way above the 100 level or way below the -100, meaning these levels are easy to be broken. Therefore, one way to deal with this is to setup the indicator in such a way to show higher levels, like for example 250 and -250 and the way to trade is to go short on any move above the 250 level as it represents overbought territory, or to go long on any move price makes below the -250 level as it is clearly representing an oversold area. In order to do that, one needs to right click on any part of the chart, choose the Indicators tab, and then Edit the CCI in such a way that the 100 and -100 levels are being changed with the 250 and -250 ones. The chart will look like this, with long and short signals being triggered:
– another way to trade this indicator is to look for divergences with price within the overbought and oversold areas. This means, one should look for price to make a series of two higher highs that is not confirmed by the oscillator, and in this case it is being called a bearish divergence, or a series of two lower lows not confirmed by the oscillator, and in this case a bullish divergence is formed. The chart below shows a bearish divergence in the sense that price makes two consecutive higher highs while the CCI is not confirming the second high with the first high being in overbought territory. This is as bearish as bearish can be and the confirmation from the divergence is only strengthening the case for an even more aggressive move to the downside. The move that follows is indeed aggressive and this is how powerful this indicator can be if treated in the right way.
There are other ways to trade with the CCI, for example to look for continuation patterns by the time the indicator is traveling through the zero level (on the way from -100 to 100 it must break the zero level) so buying on such a break is indicated, as well as selling on a move from 100 to -100 by the time the zero level is being crossed.
This way one can add to a position and may even look for the overbought and oversold territory to come and use them as a target.
Next article here on ForexGator .com is dedicated to trading with Fibonacci retracement levels and how to find important support and resistance levels by measuring different moves in order to find the proper trade.