FX indicators are a valuable tool for traders to make informed decisions about their trades. We will discuss the CCI (commodity channel index), what it is, how it is used, and the pros and cons of using it.
A brief overview of CCI
Donald Lambert first introduced the commodity channel index in 1980. It was created as a tool to identify cyclical turns in commodities, but it has since been adapted for use in forex trading
CCI measures the relationship between an asset’s current and past prices. CCI is calculated using the following formula
Current Price – Average Price over N periods / Standard Deviation over N periods x 0.015
N is typically set at 20 for most timeframes.
How is CCI used?
- To find market trends
- To enter trades
- To exit trades
- As a confirmation tool
- As an overbought/oversold indicator
How to use CCI to find market trends
Look for sustained moves above +100 or below -100 on the CCI to signal a strong trend. If the CCI is above +100, look for opportunities to buy; if the CCI is below -100, look for opportunities to sell.
Wait for the CCI to move back into the overbought / oversold zone before taking any new trades.
How to Use CCI when entering trades
Look for a buy signal when the CCI crosses above +100, or look for a sell signal when the CCI crosses below -100. Place your orders according to the trend you are trading or take profits when the CCI reaches its extreme level and reverses direction.
How to use CCI to exit trades
Exit long positions when the CCI crosses below -100 or short exit positions when the CCI crosses above +100. Place your orders according to the trend you are trading. Take profits when the CCI reaches its extreme level and reverses direction.
How to use CCI as a confirmation tool
Wait for the CCI to cross above +100 or below -100 before taking any new trades. If the CCI is already in an overbought/oversold zone, do not take any new trades or use the CCI as a confirmation tool to help you make informed decisions about your trades.
How to use CCI as an overbought/oversold indicator
Look for a buy signal when the CCI crosses above +100, and it is in an overbought area or looks for a sell signal when the CCI crosses below -100, and it is in an oversold area.
Place your orders according to the trend you are trading, or take profits when the CCI reaches its extreme level and reverses direction.
Pros and Cons of Using CCI
A few pros and cons come with using the commodity channel index as part of your trading strategy. Let’s take a look at a few of them now.
Pros
- It helps you identify market trends,
- You can use it to enter and exit trades,
- CCI can be used as a confirmation tool,
- Or CCI can be used as an overbought/oversold indicator.
Cons
- It does not work well in choppy markets,
- CCI can give false signals,
- It needs to be used with other indicators to confirm signals,
- And CCI can be lagging at times.
As you can see, a few pros and cons come with using the commodity channel index. Ultimately, it is up to you as the trader to decide if it is a tool you want to use in your trading strategy. Do your research and test it out on a demo account to see if it works well.
In conclusion
The CCI is a valuable tool for FX traders. It has some advantages, including its simplicity and adaptability, but you should consider some drawbacks. When used with other technical indicators or fundamental analysis, the CCI can help traders make informed decisions about their trades.
While CCI may not be perfect, it can still be a valuable tool for traders when used correctly. It is important to remember that no indicator works all the time and that traders should use several indicators in conjunction with one another to get the most accurate picture.