This is the third article in our CCI series. If you haven’t already, we suggest that you check out the first article about the CCI Indicator. In the previous two articles, we have covered the background, the calculations involved, and how to use and read the CCI indicator. 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.
Forex traders focus on the CCI key points of reference, which are when the curve crosses the “100” and “-100” boundary limits. As with any technical indicator, a CCI chart will never be 100% correct in the signals that it presents, but the signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding CCI signals must be developed over time. In the example below, let’s develop a simple trading system based on CCI signals and alerts.
The following trading system is for educational purposes only. Technical analysis takes previous pricing behavior and attempts to forecast future prices, but, as we have all heard before, past results are no guarantee of future performance. With that disclaimer in mind, the “green” circles on the above chart illustrate optimal entry and exit points that can be discerned from using CCI analysis for two trading opportunities.
A simple trading system would then be
- Determine your entry point when the “Red” line dips well below the “-100” lower limit line and reverses in line with pricing behavior;
- Execute a “Buy” order for no more than 2% to 3% of your account; Place a stop-loss order at 20 “pips” below your entry point;
- Determine your exit point when the CCI crosses the “100” upper limit line and is accompanied by a decline in pricing behavior.
Steps “2” and “3” represent prudent risk and money management principles that should be employed. This simple trading system would have yielded two profitable trades of 70 and 40 “pips”, but do remember that the past is no guarantee for the future. However, consistency is your objective, and hopefully, over time, CCI Technical Analysis will provide you with an “edge”.
That concludes our series on the CCI Indicator. For further reading please visit our Forex indicators section.<<
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We also recommend you to read our strategy on the Alligator indicator.