In the above example of a pro's trade, you see that the general oil trend is up; it started in April A bullish signal appears on November 9, , when the CCI line crosse level 0 upside. Next, the price starts growing, which is a good buying opportunity.
Main conditions to enter a buy trade:
The indicator period is 20 days.
The indicator line crosses the zero level upside.
Enter a buy trade the next day after the signal is formed.
A stop loss is set below the low of the daily candlestick when the signal appeared if the candlestick range is equal to or a little bigger than the average daily range of the instrument (ATR). If the candlestick has a small range, it makes sense to consider the previous day and set a stop loss below the daily low preceding the signal day. If the candlestick exceeds the ATR by two or more times, the stop loss is set at the middle level of the signal candlestick.
A take profit is recommended to be set at a distance of 3 or 4 times longer than the stop loss. You can also set the take profit at the strong resistance level of the day or an important local high.
Let us explore one more example.
You see from the AUDUSD chart above that the trend is down. The price makes a local low (1), and then makes a lower low (2). The CCI, however, makes a low (1), and the next low is higher. There is a divergence between the price chart and the CC indicator, so the market is about to turn up.
A bullish divergence is a strong signal to enter a buy trade. The trade is opened after the Pinbar Price Action pattern appears, following the second low in the chart.
There is another example of divergence in the same chart. The price chart makes low (4), lower than the preceding one (3), while the CCI makes low (4), which is higher than the previous one (3). Here emerges the bullish divergence, a strong signal to buy in technical analysis.
General conditions to enter trades based on divergence signals
You should attentively follow the extremes in the price charts and in the CCi chart. If the indicator chart and the price go in opposite directions, there is a bullish or bearish divergence. At this moment, you should try to spot a pattern to trade, according, for example, to the Price Action.
A stop loss is set based the pattern rules, according to which the position is opened. A take profit is set at the distance three times longer than the stop loss or at a strong support or resistance level, depending on whether it is a buy or a sell trade.
If you master trading bullish and bearish divergences CCI, you will enter more trades and raise the potential profitability of your trading account. Divergence signals are among the strongest ones generated by the CCI indicator.
How to Use the CCI Indicator for Day Trading
The Commodity Channel Index indicator is also suitable for intraday trading, like most technical analysis tools. In this case, the trader should switch to the M5 or M15 timeframe. The shorter the timeframe, the more signals there will be. In a longer timeframe, there will be fewer signals, but they will be more reliable.
You can leave the indicator default period at 20 or choose your own value. Don't be afraid to experiment. For highly volatile instruments, a period with a greater value should be selected. For low volatility, the opposite is true.
For intraday trading, the same rules and strategies that I described above work. Watch the CCI location relative to level 0, overbought and oversold levels +, , bullish and bearish divergences. The main difference is that the position holding time will not be several days, but several hours. However, in day trading, there are more false signals. In short timeframes M1 - M15, there is more so-called market noise, so it is not always possible to determine the general trend for the instrument.
Let us explore a few examples of CCI day trading.
Finally, let us look at the gold futures chart GC, timeframe M5. To determine the overall global trend, you can use a simple moving average with a period of A sign of a trend change will be the closing of the trading day below/above this moving average. When working with level 0 of the CCI indicator, it is important to determine the trend; otherwise, the trades will be unprofitable.
You see from the above example that the previous trading day closes below the MA It means that the trend is down at the moment. Therefore, we shall consider sell trades. An entry signal is sent when the CCI crosses the zero level downside.
During half of the day, four signals have formed. Signals 1 and 3 appeared when the price rolls back below the moving average with period , which strengthens the signals.
Signals 2 and 4 form under the MA The signals are of usual strength. Signal number 2 doesn’t work, the price doesn’t go in the needed direction, and the trade is exited with a loss.
A stop loss is set according to the following rules:
The stop loss is set above the high or below the low of the candlestick, on which the signal has formed, providing that the candlestick range is equal to or wider than the average daily range for the instrument. If the candlestick is of medium size, the stop loss is set above its high or below its low.
If the signal candlestick is of a narrow range, it makes sense to consider the previous candlestick as a reference for high/low to set a stop loss.
If the signal candlestick is twice or more greater than the average range, the stop loss is set at the middle of this candlestick.
Signals 1,2, and 3 worked out and yielded a profit, based on the principle that the take profit is greater than the stop loss by three times.
In conclusion, I can note that intraday trading is always associated with the maximum concentration of a trader's attention. You should spend much time monitoring the trading chart, which is compensated by many trading opportunities.
Signals appear frequently, such a frequency can cause a trader to overtrade. It is also necessary to take into account important financial news, they can bring significant price fluctuations and changes in the technical analysis picture of the market. Therefore, I recommend starting intraday trading only after a detailed study of the CCI indicator and gaining experience in trading in longer timeframes.
Trading with CCI indicator: Summary
The Commodity Channel Index is a good tool for any trader. In many ways, the principle of its operation is similar to other oscillators, but it also has its own unique features.
The indicator allows you to find overbought and oversold levels of the market of different strengths: + and , + and , etc. Using the indicator, you can find the optimal entry points for trading within the global trend. You can also trade in a correction.
The strongest signals from the indicator appear when divergences form between the price charts and the signal line of the indicator.
The CCI indicator is available in any popular trading platform, and if you need to calculate the indicator value manually, you can use an Excel spreadsheet.
The best timeframe for trading with the commodity channel index CCI indicator is D1, but you can trade in a shorter timeframe as well. To do this, you need to add some trend indicators to the trading system in order to reduce the number of false signals.
The CCI indicator is worth your attention, and I hope this article has been useful to you. Having studied the theory, you can move to practice and start trading with the CCI here.
Commodity Channel Index FAQs
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive /39/EC.
Now, let us add the S&P price chart to the CCI graph.
Look at the AUDUSD price chart above. The price chart makes a new high, higher than the previous one, while the CCI makes a lower high. The bearish divergence is a strong sell signal.
An entry signal here is the Pinbar price action pattern that appears when the second high forms. Next, you can see the price values fall, and the bearish movement continues for a few days.
Bullish divergence
A bullish divergence occurs when the underlying security makes a lower low while CCI forms a higher low, which shows less downside momentum.
The market provides two trading signals to buy USCrude oil. The first one appears on April 14, ; the second one is on May 27,
When the trade is entered according to the first signal, the market doesn’t reach the take profit and starts a correction. The CCI indicator breaks through the zero level from top to bottom (marked with the blue line). In this situation, I recommend exiting the trade, even if there is a loss, as the conditions for holding the position are not met, and the indicator generates an opposite signal. One should not enter a sell trade at the close of the day, marked by the blue line, as the overall trend is up.
However, a few days later, on May 27, the Commodity Channel Index generates one more signal to buy; this time, it yields a profit.
Sell signals
The bearish signal is sent when the indicator line crosses the zero line downside. At the same time, the general strong trend should be down.
You see that the CCI indicator is displayed in a separate window under the price chart of a trading instrument.
The index looks like a curve that is located either above or below zero. The indicator also has levels +, +, and , , they are used to define the price momentum, as well as the overbought or oversold condition of the market.
According to the general rules of CCI trading, all signals could be grouped into two categories: signals to trade in a trend and ones to trade in a correction.
To trade a CCI strategy in a strong uptrend, you should expect the indicator line to break the zero line upside and enter a buy trade. When you are trading in a downtrend, wait until the indicator line breaks the zero level downside and enter a sell trade.
When you want to trade in a correction, it is advised to expect when the index goes beyond the level of + or , and then begins to return back to the neutral zone. The neutral zone is the area from + to , which means that the trend has exhausted and there should start a correction.
In some cases, the market could reach levels of + or , or even + or When the price breaks out these levels and then returns back, it is a strong signal to trade on the correction. The more market deviates from its normal values, the higher the chance that the price will go back to these median values.
The Commodity Channel Index could be used as an independent trading system or as an oscillator to supplement the trading strategy. Everything depends on your investment objectives and trading skills. You can change the indicator settings, such as the period, according to your needs. However, I recommend testing the tool with the period of 20 first to try the basic CCI strategy.
History of &#;ommodity &#;hannel Index creation
Nowadays, the most popular trading assets are Forex, stocks, and cryptocurrencies. But this was not always so. You might be surprised, but financial market trading started with commodities, for example, grains, cotton, coffee, beans, etc.
Next, the first futures for these commodities appeared. Futures were needed by producers of agricultural products in order to hedge (insure) against the risks in case of crop failure and natural disasters, and buyers of these securities needed to be sure that they would receive the product at a price agreed with the seller in advance.
During its existence, commodity markets have given rise to many mathematical indicators that have gained popularity and are included in the so-called group of classical technical indicators.
The Commodity Channel Index was introduced in the October issue of Commodities magazine (now known as Futures magazine) by mathematician Donald Lambert. The commodity channel index indicator was designed to analyze the prices for commodity futures in a daily chart.
As the main idea of the CCI indicator, Donald Lambert used the idea of the market's cyclical trends. Low volatility is alternated by sharp price swings; high prices are followed by lower ones, and vice versa. The market’s movements repeat from time to time, although the repetition might not be exact.
It should be noted that the idea that the market moves in cycles is not new. It was approached by well-known traders before Lambert. The founder of wave theory Ralph Nelson Elliott, the founder of VSA analysis Richard Wyckoff, co-founder of Dow Jones & Company, Charles Dow, and others speculated upon the cyclical nature of different markets.
If one correctly defines market cycles, they could accurately determine optimal entry points when one trend finishes and an opposite one starts using the CCI indicator.
In his articles, Lambert used periods of 20 and 60 days. The first interval was used for relatively short-term trading. The second period could be employed in medium- and long-term trading. Currently, traders also apply shorter CCI periods to trading more volatile assets than commodities.
Lambert also used a daily timeframe as the primary one to spot the entry signals of the indicator. However, the CCI algorithm is quite efficient in shorter timeframes as well.
Interpretation: how to read CCI
The CCI indicator settings and trading principles are similar to other oscillators. All signals can be conventionally grouped into two types, signals to trade in the trend and signals to trade in a correction.
To define the trend, one should be guided by the principles of classic chart price analysis or apply supplementary tools. This is necessary to avoid the traps of false signals sent by the oscillator. When a trader has an understanding of the market trend priority direction, the signals of the CCI oscillator will be profitable.
CCI signals to trade with the trend
The CCI signals for trend trading appear when the CCI indicator line crosses level 0. Based on the trend direction, you should expect the indicator line to break through the zero level, either upside or downside.
The chart below displays the CCI signals to trade the EURUSD downtrend.
The blue vertical lines mark the moments when the CCI indicator line crossed the 0 level downside. Therefore, after the formation of this signal at the close of the trading day, the trader should open a sell position.
In the chart below, red vertical lines mark the days when the signals to buy in the USDCHF uptrend emerged.
Commodity Channel Index (CCI) is a hugely popular indicator among traders. Although novice traders tend to pay little attention to CCI in the beginning of their lerning curve, later they return to discover amazing potential and beautiful simplicity of the CCI indicator.
There is a variety of CCI indicators, just by looking at the screenshot below with various CCI versions, it becomes understandable - there is huge package of trading methods behind each simple and custom CCI indicator.
Fundamentals of trading with CCI indicator
Developed by Donald Lambert, original CCI consists of a single line which oscillates between +/ CCI indicator was created to identify bullish and bearish market cycles as well as to define market turning points, market strongest and weakest periods. Designed for commodities, CCI has quickly found its application in other markets including Forex.
The author advises to use CCI for entries and exits once CCI reaches +/ It goes as follows: When CCI moves above +, there is a strong uptrend confirmed, therefore traders should open a Buy position. The trade is held as long as CCI trades above + Exits will be made when CCI goes back below + Opposite true for downtrends and readings below
Since when CCI indicator was first introduces, traders have found lots of ways to interpret CCI and expand trading rules. all those methods and views will be cover here.
CCI and its Zero line
An aggressive way to enter the market is to react to CCI's line crossing its zero level. When CCI moves above Zero, traders would Buy the currency expecting a newly changed trend to hold. Vice versa, when CCI falls below zero, traders would Sell looking to benefit from early signals of an emerging downtrend.
Simple rule: Above zero - Buyers' territory, below zero - Sellers' territory;
unless, we have reached an oversold/oversold zone.
CCI overbought & oversold zones
With CCI we can separate indicator readings to 3 zones:
1. Already known, a zone above Zero (bullish) and a Zone below zero (bearish).
Trading rules: when price crosses zero line, Buy/Sell depending on the direction of a crossover.
2. An overbought zone - CCI reading above +, an oversold zone - CCI reading below
Once price moves higher above +, a strong uptrend has been established. Hold on to a Long position, but prepare to exit as soon as beautiful tall candlesticks yield place to smaller reversal candles with long shadows and small bodies.
3. An extremely overbought zone - CCI reading above +, and an extremely oversold zone - CCI reading below
Take profit & close trades. Prepare for a price reversal.
Summary: CCI indicator signals
Bonus: CCI trading Walk-through
With what we know so far, we can already read and trade with CCI indicator. Let's walk through the numbers on the screenshot below:
1 - CCI is in an overbought zone. The moment it entered there, we could have placed a Buy order, since we know that a strong uptrend has been established.
2 - CCI rises to an extremely oversold level, this is where we know that the reversal is near, so the measures are to tighten our stop loss and either exit as we spot a reversal pin bar candlestick or wait till CCI exits below
3 - The moment CCI exits + zone we should close all remaining Long trades and look to Sell. With CCI exiting from an extremely overbought zone is a perfect opportunity to initiate our first Short trade.
At the same time, should we never witness CCI above , we'll be still holding our Buy position open, because CCI continues to trade inside an overbought zone. (So, the difference is whether there was a rise above or not. If we erase #2 event from the chart, we're trading in an overbought zone and continue to hold out Long position).
4 - As price exits from an overbought zone, we close all Long positions and can immediately open Short positions / add to existing Short trades opened at point 3.
5 - CCI crosses its Zero line and now is on Seller's territory. We can open yet another Short trade.
6 - Price enters an oversold zone (below ), which tells us that a downtrend is already running strong. We can add up to a Short trade and hold till we find that CCI rises back above
The Commodity Channel Index (CCI) is a technical indicator that can identify overbought or oversold levels in market conditions as well as potential trend reversals and trade signals. It can also be used in conjunction with other technical analysis indicators to get confirmed market signals. Let's take a look at the indicator in-depth and learn how you can trade with it.
What is the Commodity Channel Index (CCI)?
CCI is a momentum oscillator that can identify the market direction and its strength. The indicator measures the difference between the current price and the historical average price to determine overbought and oversold levels. The values of CCI oscillate between + and around a zero line.
When the CCI is positive (above the zero line), it indicates that the prices are above the moving average and the market tends to be overbought.
When the CCI is negative (below the zero line), it indicates that the prices are below the moving average and signals for 'oversold' in the markets.
This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.
Trading signals provided by CCI indicator
Bullish/bearish divergences
Divergences are a potential reversal signal in the market. A bullish divergence occurs when the currency pair price makes a lower low, but the CCI makes a higher low. The divergence is confirmed when the currency pair price line breaks below zero on the CCI chart or the support on a price chart. On the other hand, a bearish divergence occurs when the currency pair price makes a higher high but the CCI makes a lower high. The divergence is confirmed when the currency pair price breaks above zero on the CCI chart or the resistance on the price chart.
This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.
New trends
CCI can determine the current trend direction by analysing the CCI value. If the CCI is above zero and rising, this indicates a continuous uptrend. If the CCI is below zero and falling, this indicates a continuous downtrend. After determining the trend direction, the next step is to look for trendline breaks. Drawing trendlines connecting the CCI's highs or lows can help identify potential trend reversals. When the CCI breaks through a trendline, it signals a potential trend reversal and the emergence of a new trend.
This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.
Trend interpretation
CCI also helps in interpreting the strength of a trend. It measures the difference between the currency pair’s price change and the average price change. A high positive reading indicates that the current prices are above the average prices and that the current trend is strong. On the other hand, when the readings are low and negative, the current prices are below their average, indicating a weak trend.
This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.
How to calculate CCI?
Determine the number of periods in which you want to analyse the CCI. periods* is a typical range for a smooth calculation.
Track the high, closing, and low prices for the periods* of the currency pair to compute the typical price.
Calculate the moving average of the typical price by adding the last 20 typical prices and dividing it by
Calculate the mean deviation for the periods* by subtracting the moving averages from the typical price for the previous periods*. Add the absolute values and divide them by
Consider the most recent typical price, moving average and mean deviation into the formula that we will mention below. This will be the current CCI reading.
Repeat the process after the end of each new period.
*The variable is not fixed. Traders need to adjust the calculation if they want to use a different number. CCI = (Typical Price - n-period Simple Moving Average of Typical Price) / ( * Mean Deviation) Where:
Typical Price = (High + Low + Close) / 3
n-period Simple Moving Average of Typical Price = Sum of the Typical Prices over the past n periods divided by n.
Mean Deviation = Mean Absolute Deviation of the Typical Price over the past n periods.
is a constant value used to normalise the CCI and make it comparable across different assets and timeframes.
It is important to note that different traders may employ use slightly different variations of the CCI formula, and that the parameters used may need to be adjusted depending on market conditions and trading strategy.
A step-by-step guide on how to trade with the CCI indicator
Add the CCI indicator to your forex chart.
Adjust the CCI indicator settings to suit your trading style. The default setting is usually 14 or 20 periods, but you should adjust it to suit your personal preferences.
Identify the overbought and oversold levels on the CCI indicator. The default levels are + and , but you can adjust them to suit your preferences*.
Look for divergence between the CCI indicator and the price action. If the CCI indicator is making higher highs while the price is making lower highs, it is a bearish divergence, and you should look for a short entry. If the CCI indicator is making lower lows while the price is making higher lows, it is a bullish divergence, and you should look for a long entry.
Use the CCI indicator to confirm your trade entry signals. For example, if the price breaks out of a resistance level and the CCI indicator is above +, it is a strong buy signal.
Use the CCI indicator to set your stop loss and target levels. For example, if you plan to go long, set your stop loss below the oversold level () and your target level above the overbought level (+).
Manage your trade using the CCI indicator and exit the trade when positions are in your favour.
*We do not give personal advice. You should carefully consider your objectives, financial situation, needs and level of experience before entering into any margined transactions.
Add the CCI indicator to your forex price chart now
The CCI indicator is a useful tool that helps spot divergences, identify overbought/oversold market levels and trading signals. Start trading with Blueberry Markets. Sign up for a live account or try a demo account.
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As soon as the index crossed the 0 line from the bottom up, and the trading day closed the price with a gain, the market continued to grow.
I want to emphasize once again that a trader should identify the trend in longer timeframes (D1, W1) to trade based on the signals described above. The trend can be identified using general techniques, such as key highs and lows in the chart, or using other technical analysis tools.
An oscillator is not meant to define trends.
If you trade each situation when the CCI crosse level 0 upside or downside, you will face a situation when the market movement is rather limited, or a stop loss works out.
Now, let us add the USCrude oil price chart to the CCI chart.
Look at the EURUSD price chart, the timeframe is M5. Numbers mark strong overbought and oversold levels of + and An entry signal is still a Price Action pattern.
In the first case, the CCI indicator reached level +, and there is a Pinbar in the price chart. A sell trade is entered.
In the second case, the CCI indicator reaches level - , and there is a Bullish Engulfing pattern in the chart. A buy trade is entered.
In the third case, the CCI reaches the overbought levels of +, and a Pinbar emerges in the price chart. A sell position is opened.
In the fourth case, the CCI reaches level +, and a bearish engulfing pattern appears in the price chart. Again, a sell trade is entered.
A stop loss is always set according to the Price Action pattern rules. A take profit is set at a distance of three times longer than the stop loss. You can also set a take profit at a strong resistance (for a purchase) or support (for a sale) level. Another option to exit a trade is when the CCI indicator reaches level + or , depending on the trade direction (buy or sell).
Thus, based on the above example, one could make a profit from four trades entered based on the CCI signals to identify overbought and oversold areas.
A sell signal appears 4 times: on June 10, , July 14, , August 23, , and September 13,
In the first case, the downward movement is limited and would not yield a reward-to-risk ratio of more than 3 for a trade.
In the second case, the sell signal forms within an ascending correction. One should not trade such a signal if one understands that the opposite correction is developing. However, there won’t be a disaster if you enter a sell trade in such a situation; you will just face a small loss within your CCI trading system.
Following the third signal, the S&P index significantly drops, and the planned target is reached. Here, the stop loss is set not above the high of the signal candlestick, but above the high of the previous candle, as the signal candle’s range is narrower than the average daily range for the instrument.
The position opened based on the fourth signal also yields a profit.
Primary conditions for a sell trade:
The indicator period is 20 days.
The CCI line crosses level 0 from top to bottom.
The trade is entered the next day after the signal appears.
The stop loss is placed above the high of the daily candle on which the signal was formed, provided that the range of the candle is equal to or slightly greater than the average daily move (ATR) of the instrument. If the candlestick’s range is narrow, then it is reasonable to consider the previous day in the calculations and set a stop loss for the high of the day preceding the signal one. And the third case is if the candle exceeds the ATR twice or more. Then the stop loss is placed in the middle of the signal candle.
The take profit is set at a distance that is 3 or 4 times longer than the stop loss. You can also set the take profit at the daily support level or a significant local low.
Overbought and oversold levels
Trading based on overbought/oversold zones means defining the so-called market borders. The market upside or downside limits are easily defined by oscillators. In trading with the CCI indicator, the overbought and oversold levels are + and , as well as + and
Levels + and are considered stronger. I suggest beginners master trading using these levels and then consider other ones.
Some traders also apply levels + and , but the indicator can reach these levels only provided the period is shortened, or the market is highly volatile.
When the CCI moves up to the overbought zone, the uptrend might be exhausting, so there should be a correction, or the trend could reverse down.
Reaching the downside limits of the oversold zone means the downtrend is weakening, and an ascending correction is about to start, or the ongoing trend might soon turn up.
Let us explore an example of the USDJPY chart to see how the price chart is moving after the CCI reaches strong levels of overbought and oversold, + and