What’s up Traders, in this article, we’re going to be talking about using Commodity Channel Index (CCI) in Forex Trading. Are you using the CCI indicator to determine whether or not an investment vehicle is oversold?
This article will explain how the CCI indicator (Commodity Channel Index) works and how to utilise it as part of a trading strategy in MetaTrader 4.
We’ll concentrate on using the CCI indicator in Forex trading, but the same ideas apply to other financial markets as well, such as stock CFDs, commodities CFDs, and so on.
Despite the fact that Forex and stocks are extremely popular today, you might be surprised to learn that the futures markets began with commodities.
Futures were first developed as a way for agricultural producers to hedge the value of upcoming crops.
Given the commodities markets’ extensive history, it’s not surprise that several useful technical indicators have emerged from research into that sector of the financial market.
The Commodity Channel Index indicator is one such tool (or CCI indicator). Don’t be fooled by the name; while it was designed with commodities in mind, it works just as well with Forex, equities, and other financial instruments.
What is the Commodity Channel Index (CCI) and How does it work?
- How is the Commodity Channel Index calculated?
- What can you learn from the Commodity Channel Index?
- The Stochastic Oscillator vs. the Commodity Channel Index
- The Commodity Channel Index’s limitations
The Commodity Channel Index (CCI) is a momentum-based oscillator that can be used to identify when an investment vehicle is overbought or oversold.
This technical indicator, created by Donald Lambert, examines the direction and strength of price trends, allowing traders to decide whether to enter or exit a trade, refrain from entering a trade, or add to an existing position.
When the indicator behaves in a certain way, it can be utilised to offer trade signals.
The Commodity Channel Index (CCI) is a technical indicator that compares the current price to the historical average price.
When the CCI is more than zero, it means the price is higher than the historical average. When the CCI is lower than zero, the price is lower than the historical average.
The CCI is an unbounded oscillator, which means it can move indefinitely higher or lower.
As a result, for each specific asset, overbought and oversold levels are often defined by looking at prior extreme CCI levels where the price reversed from.
The Commodity Channel Index (CCI) has the following formula:
How is the Commodity Channel Index calculated?
1.Determine the number of periods that your CCI will examine. The number twenty is frequently used.
A more volatile indication is produced by fewer periods, while a smoother indicator is produced by more periods.
We’ll use 20 periods for this calculation. If you’re using a different number, adjust the computation.
2.Calculate the typical price by tracking the high, low, and close for 20 periods in a spreadsheet.
3.Calculate the moving average (MA) of the normal price after 20 periods by adding the last 20 typical prices and dividing by 20.
4.Subtract the MA from the typical price for the last 20 periods to get the mean deviation. Add the absolute values of these figures (ignoring minus signs) and divide by 20.
5.To calculate the current CCI reading, enter the most recent typical price, the MA, and the mean deviation into the calculation.
6.As each new period expires, repeat the process.
What can you learn from the Commodity Channel Index?
When the CCI rises over 100 from a negative or near-zero level, it may signal the commencement of a new uptrend.
Traders might look for a price decline followed by a rally in both price and the CCI to identify a buying opportunity once this happens.
An nascent decline follows the same logic. A downtrend may be beginning when the indicator moves from positive or near-zero readings to below -100. This is a sign to exit long positions or begin looking for shorting possibilities.
Because the indicator is unbound, overbought and oversold levels are not established. As a result, traders examine previous indicator readings to determine where the price reverted.
It’s possible that one stock will tend to revert near +200 and -150. Meanwhile, another commodity may be prone to reversing at +325 and -350. Zoom out on the chart to see a lot of price reversal points and their CCI values.
Divergences occur when the price moves in the opposite direction as the indication. If the price is rising but the CCI is declining, the trend may be weakening.
While divergence is a poor trading signal because it can linger for a long time and does not necessarily result in a price reversal, it can at least alert the trader that a reversal is possible.
They can tighten stop loss levels or hold off on executing fresh trades in the direction of the price trend this way.
The Stochastic Oscillator vs. the Commodity Channel Index
These technical indicators are both oscillators, but they are calculated in quite different ways.
One of the most significant differences is that the Stochastic Oscillator is limited to a range of zero to 100, but the CCI is not.
They will produce different indications at different periods due to the computation differences, such as overbought and oversold readings.
The Commodity Channel Index’s limitations
While the CCI is frequently used to identify overbought and oversold positions, it is quite subjective in this regard.
Because the indicator is not constrained, previous overbought and oversold levels may have minimal bearing in the future.
The indicator is also sluggish, which means it can give false signals at times. A surge to 100 or -100 to herald the start of a new trend may be too late, as the price has already run its course and is beginning to correct.
Whipsaws occur when an indicator provides a signal but the price does not follow through on that signal, resulting in a loss of money on the trade.
Whipsaws can happen a lot if you’re not careful. To confirm or reject CCI signals, the indicator should be utilised in conjunction with price analysis and other forms of technical analysis or indicators.
The Commodity Channel Index DUAL (DCCI)
- What is the DUAL Commodity Channel Index?
- DUAL Commodity Channel Index: An overview (DCCI)
- Technical Analysis and the DUAL Commodity Channel Index
What is the DUAL Commodity Channel Index?
The dual commodity channel index (DCCI) is a technical analysis technique that can be used to determine whether an asset or market is overbought or oversold.
A dual commodity channel index is a variant on the widely used commodity channel index, which was created by Donald Lambert in 1980 to assess the deviation in a commodity’s value from the statistical mean.
The dual commodity channel index is a technical analysis tool that can be used to determine whether an asset has been overbought or oversold. It’s built on the well-known commodity channel index.
The dual commodity channel index is an oscillator, which means it swings back and forth between two extremes. When an asset reaches its maximum value, it has been overbought. When an asset reaches its minimum value, it has been oversold.
DUAL Commodity Channel Index: An overview (DCCI)
A dual commodity channel index is created by plotting a smoothed commodity channel index line next to an unsmoothed commodity channel index line that both measure the same commodity, currency, or financial security.
Crossovers of the two lines signal potential buy and sell signals, while subsequent breaches in the price trendline imply definitive entry and exit locations.
The dual commodity channel index is a type of oscillator used in technical analysis. It’s an index based on the value of a financial asset that oscillates between two extreme values.
When the index reaches its maximum value, it means the asset has been overbought and is about to fall in value.
When the index reaches its lowest point, it signals that the asset has been oversold and is due for a price gain.
The commodity channel index is computed by dividing the difference between the current price of a financial asset and its simple moving average by the price’s mean absolute deviation.
A dual commodity channel index depicts two types of CCI lines, offering traders a more detailed picture of the momentum of a financial asset.
Technical Analysis and the DUAL Commodity Channel Index
For investors who utilise technical analysis to make trades, the dual commodity channel index is a popular instrument.
Technical analysis varies from fundamental analysis in that it analyses information such as a company’s earnings, the status of the economy, political events, and other factors outside of a security’s price to discover undervalued or overvalued assets.
Technical analysis assumes that the great majority of available information about a stock, bond, commodity, or currency is almost instantly integrated into the price by market forces, and that making investment decisions based on this knowledge isn’t lucrative.
The key to technical traders’ investing success is translating the market’s mass psychology into indicators that allow them to timing their entry and exit from a stock or security.
Using the Commodity Channel Index to Time Trades
- Getting to know the CCI
- Making use of the CCI
- Don’t rely on CCI alone
Donald Lambert’s book “Commodity Channel Index: Tools for Trading Cyclical Trends” introduced the Commodity Channel Index (CCI).
The indicator has increased in popularity since its inception, and it is now a widely used tool for traders to identify cyclical movements in commodities, equities, and currencies.
We’ll look at how the CCI works in this, as well as how you can use it to improve your trading.
Getting to know the CCI
The CCI was created, like most oscillators, to assess overbought and oversold levels.
The CCI accomplishes this by calculating the relationship between price and a moving average (MA), or more precisely, normal deviations from the average.
The following example of a CCI calculation demonstrates how this measurement is made.
Typical Price=asset’s price on a particular day
in the time period
Simple Moving Average=arithmetic mean of asset’s
price over a time period
Mean Deviation=mean of the absolute deviations of the
asset’s price over a time period
The only requirement for computing the CCI is establishing a time interval, which is crucial for improving the CCI’s accuracy.
Because moving averages are being used to predict a cycle, the closer the moving average amounts (days averaged) are to the cycle, the more accurate the average will be. This is true for the vast majority of oscillators.
Although most traders use the default time interval of 20 for the CCI calculation, a more precise time range decreases the number of false alerts.
To determine the best interval for the computation, follow these four simple steps:
1.Open the yearly chart for the stock.
2.On the chart, find two highs or two lows.
3.Keep track of the time between these two highs or lows (cycle length).
4.To acquire the ideal time period to employ in the computation, divide that time interval by three (1/3 of the cycle).
This approach was used on Oracle Corporation (ORCL) in the following way:
As can be seen, one cycle (from high to high) begins on September 11 and ends on January 29.
This corresponds to around 140 trading days, which, when multiplied by three, yields a time span of about 47 days.
Making use of the CCI
Since its inception, the CCI calculation has been included as an indication in a variety of charting applications, removing the need to perform the calculations manually (happily).
The majority of these charting programmes only request you to enter the time interval you want to utilise.
A default CCI chart for Oracle is shown in Figure 2:
It’s worth noting that the CCI resembles any other oscillator in appearance and function.
The following are the fundamental guidelines for interpreting the CCI:
Possible sell signals include the following:
*The CCI has begun to slope downward after crossing above 100.
*There is negative divergence between the CCI and real price movement, which is defined as a downward movement in the CCI while the asset’s price continues to rise or goes sideways.
Potential buy signals include the following:
*The CCI has begun to curve upward after crossing below -100.
*There is a bullish divergence between the CCI and the actual price movement, with the CCI moving upward while the asset’s price moves downward or sideways.
Candlestick patterns (shown as supplements within the charts above) might assist confirm specific tops and bottoms during the CCI’s “selling phase” (time when it is above 100) or “buying period” (time when it is below 100). (time in which it is below -100).
Although all price trading ranges are flexible, the CCI is meant to take advantage of prices that have moved outside their regular range and are likely to revert.
When the CCI is very high, traders may want to sell their holdings or covered calls, while when the CCI is very low, they may want to buy more.
Don’t rely on CCI alone
The CCI, like many other trading tools, must be used in conjunction with other indicators.
Because both methodologies try to locate turning points, pivot points and the CCI function well together. Moving averages are also used by some traders.
The CCI, like any other momentum oscillator, isn’t meant to be utilised on its own. Complementing this indication with another technical instrument, such as a price channel, may be more beneficial.
CCI entry and exit levels must also be adjusted dependent on the volatility of the underlying securities; for example, an index exchange-traded fund (ETF) is typically less volatile than an individual stock issue.
The Commodity Channel Index is a very important tool for traders who want to figure out where to buy and sell in a cyclical pattern.
Traders can get the most out of this tool by (a) computing an exact time interval and (b) combining it with a variety of other technical indicators.
MT4 and the CCI Indicator
In MT4, look for the CCI indicator in the ‘Oscillators’ folder under the ‘Navigator’ tab. The indicator looks like this:
Actual appearance of the Commodity Channel Index Indicator.
MetaTrader 4 – USDCHF 1 Hour chart with Commodity Channel Index Indicator applied.
I’m applied the CCI MT4 default values to an hourly USDCHF chart in the image above.
When you first start the indicator, the number of periods is set to 14, and the method of computation is set to typical price (that is, HLC/3).
In MetaTrader 4, How do I alter the CCI indicator settings?
You have the option of changing the default settings. One method is to modify the number of periods, which is an important issue to consider when utilising the indicator.
As previously indicated, the default number of periods in MT4 is 14. Donald Lambert’s original standard length was 20 periods, but he considered any number between 5 and 25 to be appropriate.
If you make the time too short, the index will have a whipsaw effect, and regular price swings may appear as tops and bottoms.
If you use an excessively long period, the indicator will have a response time that is too slow to give you with timely signals.
In place of a standard pricing, you can alternatively utilise different data values.
If you experiment with these different parameters, you’ll notice that they have a minor impact on the indicator’s curve.
However, it can have a minor impact on the timing of those key tops and bottoms. So, what are the ideal CCI indicator settings?
So, start with the default settings and see how they work for you. You can then change the amount of periods to see whether it makes a difference.
You can apply the same logic to the method of calculation. It’s just a matter of trial and error to see what works best for you.
Of course, practising with real money can rapidly become prohibitively expensive, which is why having a free demo account is so beneficial.
You can alter the parameters as much as you like in a demo trading environment, and you will only risk real money when you transfer to a live trading account.
Trading Strategy using the CCI Indicator
When we look at how the CCI is computed, we can see that its primary purpose is to tell us how an instrument’s price change at any given moment compares to the average price.
When the CCI is high, it means that prices are higher than average. As a result, the CCI rising to one of these levels indicates increased strength.
When the CCI is really low, on the other hand, it means the price is much below average. It is a show of weakness to fall to this level.
Miller’s trading rules for his indicator are straightforward. It is a hint to take a long position if the CCI line rises over +100. When the line crosses back below +100, you close the position.
The same logic applies in the opposite direction: if the CCI line falls below -100, it’s a bearish signal, and you should go short. When the CCI line rises above the -100 mark, you would close a short bet.
Professional traders have proposed variations on these principles over the years, such as defining +200 and -200 as extreme overbought and oversold levels, respectively.
There is a significant likelihood of a reversion to the mean if the indicator reaches these levels.
The CCI, like all other trading indicators, can be improved by combining additional tools into your system.
Though MT4 comes with a number of indicators, the MetaTrader Supreme Edition plugin for MetaTrader 4 and MetaTrader 5 significantly expands the number of tools available to you.
With MTSE, you not only have access to a larger number of indicators, but you also gain access to a number of useful features, such as customised charts and tools for better order management.
Overview of the Forex CCI Indicator
The Commodity Channel Index indication is an example of a tool made feasible by technological advancements.
Many older indicators were created with the intention of being calculated by hand on a daily basis.
The CCI indicator is one of a newer breed of indicators that can only be calculated by a computer for practical purposes.
As we’ve seen, the Commodity Channel Index indication is a simple and straightforward way of determining when buying or selling opportunities exist.
And you can use it for pretty much any market you’re interested in – despite its commodity-based origins, it works equally well for Forex and stocks. Why not give it a shot now to see if it fits your trading style?
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