How to Use Commodity Channel Index (CCI) Indicator in Forex Trading

Forex Trading with Commodity Channel Index (CCI) Indicator: Key TakeawaysForex traders can benefit from using the CCI indicator in several ways: 1. Identifying Trend Reversals: CCI can help traders identify possible trend reversals by generating overbought and oversold signals. 2. Determining the Strength of a Trend: CCI can also be used to determine the strength of a trend by measuring how far away the current price is from the statistical average. 3. Identifying Divergences: CCI can also be used to identify potential divergences between the currency pair's price and the indicator's value, which can be an early warning sign of a potential trend reversal.

Commodities markets have been around for a long time, so it isnt surprising that some valuable technical indicators have emerged from their analysis. An example of one such valuable technical analysis tool is the Commodity Channel Index (CCI) Indicator. Although it was originally developed with commodities in mind, it can be applied to other financial instruments as well, including Forex, stocks, and bonds.  

Throughout this article, well discuss how to use the CCI indicator for Forex trading, however, these principles apply equally to stock CFDs, and commodity CFDs, as well.

Commodity Channel Index (CCI) Indicator: An Overview 

The Commodity Channel Index (CCI) Indicator is an oscillator used to determine the strength of a price movement. Essentially, by looking at this indicator, traders are able to judge whether bullish or bearish forces are in control of the markets. Thus, it displays some similarities with the Momentum Indicator, oscillating in value on either side of a zero-value centerline. It is bounded by a line that has a 100-point range on either side of it. 

The CCI compares the current price of an asset to its average price over a certain period of time, typically 14 days. If the current price is above the average, the CCI will be above 100, and if the current price is below the average, the CCI will be below 100. Traders use the CCI to identify overbought and oversold levels in an asset, as well as potential trend changes. By comparing the current price to the historical average, the CCI provides a way for traders to gauge whether an assets price is unusually high or low, which can help them make more informed trading decisions. 

The Commodity Channel Index (CCI) Indicator is considered to be a relatively modern indicator since it was first conceived after the advent of computing. Unlike many older indicators, which were originally calculated by hand, this indicator was designed to be electronically processed from the beginning. 

The Commodity Channel Index (CCI) Indicator was invented by Donald Lambert, a market analyst who published it in Commodities magazine in October 1980. CCI can be used for any trading instrument in the financial market since it is a universal indicator. Simply put, the CCI indicator belongs to the so-called oscillators, which measure the deviations in the price of an instrument from its moving average.

How Commodity Channel Index (CCI) Indicator Works？ 

The Commodity Channel Index (CCI) is a momentum oscillator that compares the current price of an asset to its average price over a certain period of time. The CCI is typically used to identify overbought and oversold conditions in an asset, as well as potential trend changes. 

Here we can see how the CCI Indicator is seen on the chart of GBP/USD (the blue line, oscillating between the extreme two levels).

Using the CCI indicator, we can determine whether the current price level is far above or below the moving average. It is up to the trader to set the period of the moving average. The more deviation there is in the short-term relative to the averaged value, the higher the oscillator line will go from zero (if there is an uptrend) or the lower it will go (if there is a downtrend). Its common for the indicator line to oscillate between +100 and -100 most of the time. An asset that is overbought or oversold is indicated by the line leaving this range. This is a basic signal you get from the Commodity Channel Index. 

The Commodity Channel Index (CCI) Indicator, unlike RSI or Stochastic Oscillator, cannot be limited by levels +100 and -100. There is a chance that the Commodity Channel Index line will fall to levels -200 and -300, which will only indicate that the market is in deeply oversold territory.

How to Calculate Commodity Channel Index (CCI) Indicator？ 

The Commodity Channel Index (CCI) Indicator is calculated using the formula below: 

CCI = (Typical Price - Moving Average) / (0.015 x Mean Deviation)

where: 

• Typical Price (TP) = (High + Low + Close) / 3 

• Moving Average of Typical Price (MA) = Average of Typical Price over a certain number of periods (commonly 14 periods) 

• Mean Deviation (MD) = Mean deviation of Typical Price from the Moving Average of Typical Price over a certain number of periods (commonly 14 periods) 

In this formula “Typical Price” is the arithmetic mean of any candles minimum, maximum, and close values. SMA is a regular moving average line that is plotted by typical prices within a given period. 0.015 is the experimentally determined constant. 

Lambert maintained a constant at .015 because 70% to 80% of CCI values ranged between -100 and +100. There is also a relationship between this percentage and the look-back period. A shorter CCI (10 periods) will have fewer values between +100 and -100, making it more volatile. And a longer CCI (40 periods) will contain a greater proportion of positive and negative values. 

Standard Deviation is a simple moving average plotted not by typical prices, but by value (Typical Price – SMA). That is, first you need to subtract a simple moving average value from the typical price value, and then average the obtained value by the SMA formula once again. The moving average period is always the same.

How to read the Commodity Channel Index (CCI) Indicator？ 

To read the CCI indicator, you will need to look at the CCI line on the chart and consider its position in relation to the +100 and -100 levels, as well as its direction. 

• If the CCI line is above +100, it can be seen as a signal that the asset is overbought and may be due for a price correction. 

• Conversely, if the CCI line is below -100, it can be seen as a signal that the asset is oversold and may be due for a price increase. 

• When the CCI line crosses above +100, it can indicate a potential uptrend, and when it crosses below -100, it can indicate a potential downtrend. 

Its important to note that the CCI is a lagging indicator, meaning it is based on past price data. Therefore, it should be used in conjunction with other indicators and chart patterns to confirm trade signals and avoid false signals.

How to set up a Commodity Channel Index (CCI) Indicator？ 

To set up the Commodity Channel Index (CCI) indicator for trading, you will need to follow these steps: 

• Choose a charting platform: You will need to use a charting platform that supports the CCI indicator. There are many different charting platforms available, both online and as downloadable software, so you can choose one that best suits your needs. Enjoy a whole new trading experience now with AximTrade mobile app. 

• Add the CCI indicator to your chart: Once you have selected your charting platform, you will need to add the CCI indicator to your chart. This is typically done by selecting the CCI indicator from a list of available indicators, and then customize the settings to your preference. The most common settings are the number of periods to calculate the moving average and the mean deviation, which is typically 14 periods. 

• Adjust the settings: You can adjust the settings of the CCI indicator, such as the number of periods used to calculate the moving average, to suit your trading style and goals. 

• Use the CCI in your trading strategy: With the CCI indicator set up on your chart, you can use it in your trading strategy. You can use the CCI to identify overbought and oversold conditions, potential trend changes, and divergences between the price of the currency pair and the CCI indicator. 

• Use it in conjunction with other indicators and chart patterns: Its important to note that the CCI is a lagging indicator, meaning it is based on past price data. Therefore, it should be used in conjunction with other indicators and chart patterns to confirm trade signals and avoid false signals. 

Its also worth pointing out that the best way to use CCI is to test it and find the best settings that fit your trading style, and not rely solely on one indicator but use multiple indicators and tools to make better trading decisions. 

CCI Indicator for MT4: When you look under the 'Navigator' tab of MT4, you'll find the CCI indicator under the 'Oscillators' folder.

---

How does the CCI Indicator work in Forex trading？ 

The Commodity Channel Index (CCI) is one of the most popular technical indicators used in forex trading to identify overbought and oversold conditions in a currency pair, as well as potential trend changes. 

Lets explore the different ways Commodity Channel Index (CCI) Indicator can be used in forex trading individually: 

1. Identifying a New Trend 

The Commodity Channel Index (CCI) indicator can be used to identify a new trend in the forex market by looking for a crossover of the CCI line above or below certain levels. 

• To identify a new uptrend with the CCI indicator, traders typically look for the CCI line to cross above +100. This can indicate that the currency pair is becoming overbought and may be due for a price correction, but also that the uptrend is confirmed. 

• To identify a new downtrend with the CCI indicator, traders typically look for the CCI line to cross below -100. This can indicate that the currency pair is becoming oversold and may be due for a price increase, but also that the downtrend is confirmed. 

Its important to note that these are only signals, confirmation of the trend change is always done in multiple ways, with various indicators and chart patterns, and also by keeping an eye on the fundamentals, and not relying solely on one indicator alone. 

2. Overbought and Oversold Signal 

The Commodity Channel Index (CCI) indicator can be used to identify overbought and oversold conditions in a currency pair by comparing the current price to the historical average price. 

• To identify overbought conditions with the CCI indicator, traders typically look for the CCI line to be above +100. This can indicate that the currency pair has become overbought and may be due for a price correction. 

• To identify oversold conditions with the CCI indicator, traders typically look for the CCI line to be below -100. This can indicate that the currency pair has become oversold and may be due to a price increase. 

It‘s important to note that these signals are not always accurate, and traders should use other indicators and chart patterns to confirm them and avoid false signals. Additionally, it’s important to keep in mind that different markets and assets may have different overbought and oversold levels, and the +100 and -100 levels are just general guidance, and traders may adjust the levels according to their preferences and backtesting results. 

3. Bullish and Bearish Divergences 

The Commodity Channel Index (CCI) indicator can be used to identify bullish and bearish divergences between the price of a currency pair and the CCI indicator. 

A bullish divergence occurs when the price of a currency pair is making new lows, but the CCI is not, which can indicate a potential reversal to the upside. This happens when the price is trending downwards but the CCI is trending upwards, indicating that momentum is reversing. 

To identify a bullish divergence with the CCI indicator, traders should look for: 

• Lower lows in the price 

• Higher lows in the CCI 

A bearish divergence occurs when the price of a currency pair is making new highs, but the CCI is not, which can indicate a potential reversal to the downside. This happens when the price is trending upwards but the CCI is trending downwards, indicating that momentum is reversing. 

To identify a bearish divergence with the CCI indicator, traders should look for: 

• Higher highs in the price 

• Lower highs in the CCI 

It's important to note that these divergences are not always accurate, and traders should use other indicators and chart patterns to confirm them and avoid false signals. Additionally, when identifying divergences, it's crucial to also look at other factors such as volume and volatility, which can confirm or deny the divergence.

---

In a quick summary, here are some benefits of using the CCI indicator in forex trading: 

• Identifying overbought and oversold conditions: The CCI compares the current price of a currency pair to its average price over a certain period of time. When the CCI line is above +100, it can be seen as a signal that the currency pair is overbought and may be due for a price correction. Conversely, when the CCI line is below -100, it can be seen as a signal that the currency pair is oversold and may be due for a price increase. 

• Identifying potential trend changes: The CCI is also used as a trend-following indicator. When the CCI line crosses above +100, it can indicate a potential uptrend, and when it crosses below -100, it can indicate a potential downtrend. 

• Identifying divergences: Traders might also look for divergences between the price of the currency pair and the CCI indicator. A bullish divergence occurs when the price is making new lows but the CCI is not, which can indicate a potential reversal to the upside. A bearish divergence occurs when the price is making new highs but the CCI is not, which can indicate a potential reversal to the downside. 

• Flexibility: The CCI indicator is versatile and can be used on different timeframes, making it a useful tool for both short-term and long-term traders. 

• Easy to understand: The CCI is relatively easy to understand and implement, making it a popular choice among traders of all experience levels. 

Commodity Channel Indexes are usually most effective when used as filters, the same way most oscillators are used. However, if used correctly, this indicator can also serve as an extremely reliable indicator for entering the market.

---

Best CCI Indicator Combinations for Forex Trading 

The Commodity Channel Index (CCI) indicator can be used in combination with other indicators to confirm trade signals and provide a more complete picture of market conditions. Here are a few examples of indicators that can be used in combination with the CCI: 

CCI Indicator & Moving Averages 

Moving averages can be used in combination with the CCI to confirm trend changes. For example, a bullish crossover between a 50-period moving average and a 200-period moving average can confirm a new uptrend identified by the CCI crossing above +100. 

CCI Indicator & Relative Strength Index (RSI) 

The RSI is another popular momentum oscillator that can be used in combination with the CCI to identify overbought and oversold conditions. When the RSI and CCI indicators both indicate an overbought or oversold condition, it can provide a stronger signal. 

CCI Indicator & Fibonacci Retracement 

The Fibonacci retracement indicator can be used to identify potential support and resistance levels, which can help traders to find entry and exit points. When combined with CCI, it can also confirm trend changes, especially when the price is retracing to a Fibonacci level but CCI is still showing a trend change. 

CCI Indicator & Bollinger Bands 

Bollinger Bands are a volatility indicator that consists of a moving average and two standard deviation lines plotted above and below it. When used in combination, CCI and Bollinger Bands can provide a robust trading strategy by combining the strengths of both indicators. For example, CCI can be used to identify overbought and oversold conditions and potential trend changes, while Bollinger Bands can be used to confirm price breakouts and potential price levels for entry and exit points.

---

Limitations of Using Commodity Channel Index (CCI) Indicator 

While the Commodity Channel Index (CCI) Indicator is a popular technical analysis tool used in forex trading, like any other indicator, it has its own limitations. 

• Lagging indicator: CCI is a lagging indicator, which means it is based on past price data. This can make it less effective in rapidly changing market conditions, or in catching the very early stages of a trend change. 

• Signals can be false: Overbought/oversold signals or trend change signals generated by the CCI can be false, and traders should use other indicators and chart patterns to confirm them and avoid false signals. 

• It depends on the period you set: The CCI signals depend on the period that is used to calculate the average, the higher the period the fewer signals you will get but the more reliable the signals will be, and the lower the period the more signals you will get but the less reliable they will be. 

• Not suitable for all markets: CCI is mainly used in commodity and stock markets. In forex markets, CCI can be used to identify overbought and oversold conditions, but it may not provide a reliable signal for trend changes and divergences as it is a lagging indicator and its based on past price data, which may not reflect the current market conditions. 

• Market conditions can affect its performance: CCI indicator can be affected by the volatility and market conditions, during high volatility market conditions the signals can be weaker, and during low volatility market conditions, the signals can be stronger. 

Its important to remember that no single indicator can provide a definitive answer on its own and that traders should use multiple indicators and tools in conjunction with an understanding of market conditions and fundamentals to make better trading decisions.

Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.