Commodity Channel Index Strategy - How to Use the CCI in Forex Trading
Updated: May 14, 2013 at 9:30 AM
This is the second article in our CCI series. If you haven’t already we suggest that you check out the first article about the CCI Indicator. In that article, we covered the background of the “Commodity Channel Index”, or “CCI”, indicator, how it is calculated, and how it looks on a chart. The CCI measures the difference between the mean price of a currency and the average of the mean price over a chosen period of time. Traders use the index to determine overbought and oversold conditions and the beginnings and endings of cycles in the forex market.
The CCI is classified as an “oscillator” since the majority of values fluctuates between values of “100” and “-100”. The indicator typically has lines drawn at both the “100” and “-100” values as warning signals. Values exceeding these boundary limits are interpreted as a strong overbought condition, or “selling” signal when over “100”, and if the curve dips below “-100”, a strong oversold condition, or “buying” signal, is generated.
How to Read a CCI Chart
The CCI with a period setting of “14” is presented on the bottom portion of the above “15- Minute” chart for the “GBP/USD” currency pair. In the example above, the “Red” line is the CCI. It attempts to mimic the cycle of the underlying currency and to alert when cycles are due to reverse.
The key points of reference are when the curve cross the “100” and “-100” boundary limits. The “CCI Rollercoaster” tends to work better when the period setting is approximately one-third of the related cycle. However, determining cycles in forex markets are difficult, the reason for the inconclusive series of signals during the first part of the chart. For these reasons, it is always prudent to complement the CCI with another indicator.
As with any technical indicator, a CCI chart will never be 100% correct. False signals can occur, but the positive signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding CCI signals must be developed over time, and complementing the CCI tool with another indicator is always recommended for further confirmation of potential trend changes.
In the next article on the CCI indicator, we will put all of this information together to illustrate a simple trading system using this CCI oscillator.
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Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.