As we have already mentioned, the strategy is one of the simpler ones and therefore you only need to set the indicator period well in our case period 34 and then just wait for the CCI value to pass through the zero boundary see below - vertical line. The most important thing, which of course ultimately affects the resulting success rate the most, is the appropriate setup and the "right" choice of currency pair.

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The Commodity Channel Index is an indicator used in the technical analysis of the financial and forex markets. The CCI indicator, short for commodity channel index is a momentum based indicator and belongs to the oscillator group of technical indicators.

Invented by Donald R. Lambert was not a trader, but rather came from an academic background. He had degrees in mathematics, statistics and accounting, which helped him in formulating the commodity channel index. Lambert developed the commodity channel index to identify the cycles in the commodity markets. As a momentum based indicator, the CCI index belongs to the oscillator group of indicators.

Such indicators typically move around fixed values and can depict changes in volume or momentum. Such indicators are typically placed in the sub-window below the price chart. Indicators like the CCI index are used in forex trading to mainly identify overbought and oversold conditions in the market, but it can also be applied in various other ways as well. Alternately, forex traders also use the cci indicator to warn about extreme market conditions when trends are the strongest or weakest.

Many beginners in forex trading usually apply a technical indicator using a uniform set of rules. Traders then apply the rules blindly regardless of whether the markets are trending or ranging. No wonder then that most beginners complain that indicators such as the commodity channel index do not work as expected. What many do not know is that indicators such as the cci index can behave completely different to changing market conditions. Therefore, using them in a standard way will not result in optimal results.

This lesson will help to clear any confusion you might have about using the cci indicator or a cci trading strategy. It will also help you to understand the math behind how the cci indicator values are calculated. You will also learn how to properly read the technical signals from the forex cci indicator. Last but not least, you will know how to apply this knowledge and how to improve your technical analysis when using the commodity channel index indicator.

The CCI indicator or the commodity channel index indicator, as we have just learned is an oscillator. Below is the cci indicator in Metatrader. It is one of the many standard indicators that are available by default, so you do not have to download any custom indicators.

Figure 1: The Commodity Channel Index indicator. The forex cci indicator belongs to the group of oscillators that measures momentum. In physics, momentum is described as the quantity of motion in a moving body. Momentum is measured by mass and velocity. You might now be asking, how a concept in physics made its way into the forex markets? When it comes to the financial markets, forex for example, momentum takes a slightly different meaning.

However, the overall concept remains the same. Imagine you are riding a motorbike. When you increase the accelerator, you put some effort the engines begin to draw more gas, and the pistons drive the machine. After a while your motorbike starts to speed up. Now, even if you ease back on the accelerator, the momentum that was built, will continue to keep the motorbike moving forward even without any effort. At some point, as momentum starts to wear off, your motorbike starts to slow down as well.

Eventually your motorbike comes to a standstill. The cci forex indicator simply calculates and visually depicts how fast prices are rising or falling. The speed at which the price of a security rises or falls will tell you whether price will continue moving in that direction or not. Of course, when momentum wears off, you can expect price to pull back; either make a correction or reverse trend completely or even move sideways.

It is as simple as that. The CCI indicator has three variables that you can change. Period : The period in the cci indicator setting is used to set the number of look-back periods. The standard cci setting is 14 periods. This value can be changed based on the forex cci strategy that you use. Type of price: The type of price is a drop down that you can select.

The standard setting is Typical price. Typical price is simply the average of the High, low and close. Levels: Last but not the least, are the levels in the cci indicator. These values can of course be changed as well. In Figure 2, you can see the CCI indicator in the metatrader trading platform. We use only the default values to keep things simple. We have the standard forex cci indicator with the default settings which is a period lookback period.

This serves as the basis for calculating the cci data for the past periods. If applied on the daily chart this would be days or if applied on a 1-hour chart, this would be the past 14 hours. Similarly, when the cci indicator falls below , the indicator suggests strong downside momentum and signals a continuation in the decline in price.

Figure 2: CCI indicator in metatrader with default settings. So far we have learned what momentum is, and how the cci indicator is used to signal the momentum in price. Now, it is time to understand the cci calculation to get a complete view of how the indicator plots the values. The cci indicator uses the following mathematical expression to calculate momentum:. Mean deviation is derived by subtracting the period SMA value of the typical price from the typical price.

The values are then summed up and divided by the total number of periods, which is If the above calculations look a bit complicated, do not worry. The main takeaway you should concern yourself with is that the CCI indicator uses the typical price and measures it against the period simple moving average value. The result is then divided by the constant 0.

Generally, when momentum in price is strong, you can expect a deviation from the mean price. As long as the momentum exists, price will continue moving in that direction rising or falling. Or simply, a correction in the most recent price trend. In summary, the CCI calculation measures how fast prices are rising or falling, by moving within the fixed levels mentioned. Now that we understand how the cci indicator works, the next step is to know how the cci indicator is used.

A CCI trading system can be built in the following three ways, depending on how the markets are behaving. The CCI trend indicator can be used to signal the strength of the trend. When a trend exhibits strong momentum, there is a high probability that price will continue rising or falling. This means you can expect price to continue in the same direction. So, the next time you want to know how strong the trend of a security is, simply look at what the cci indicator is suggesting.

Using the CCI as a trend indicator is ideal when combined with other trend indicators such as moving averages. This can help you to pick bottoms in a rally or tops in a decline. In other words, using the cci as a trend indicator, you can time your entries within a trend. In figure 3, this is explained visually. You have the 50 and 20 period exponential moving average EMA applied to the price chart.

When the short term moving average 20 is above the long term moving average 50 , it signals an uptrend. Now, using the CCI indicator, you can see that the bullish momentum is renewed every time the CCI falls below the level. Figure 3: The CCI as a trend indicator. When the CCI indicator starts to rise back above , the bullish trend resumes, thus giving traders a good level to enter the trend. How can you use the cci trend indicator? Using the cci as a trend indicator can help you to time your entries into a trend.

Instead of buying at the top or selling at the bottom, which usually happens with most traders, the CCI index can signal to you when the best time is to enter a trend. As with most other oscillators, the CCI indicator can also be used to spot divergence.

In this context, you can compare the price highs or lows to the CCI index values. Generally, lower lows or higher highs or higher lows and lower highs in price should reflect in the CCI posting the same values. When there is a discrepancy when comparing the highs and lows, you can expect the cci divergence to result in a price correction.

When a cci divergence occurs, it usually coincides with a slowdown in momentum. And we know that when momentum slows, price will most likely stall or reverse direction. Figure 4: CCI divergence indicator. In figure 4, you can see the CCI divergence pattern at work. In the first instance, price plots a higher high. This should mean that the CCI indicator should also be plotting a higher high. Instead, we get a lower high in the cci index, which signals a regular bearish divergence.

This signals that the momentum is fading and therefore we can expect price to fall. In the second instance, you can see something different.

The CCI trend indicator can be used to signal the strength of the trend. Many beginners in forex trading usually apply a technical indicator using a uniform set of rules. Instead, we get a lower high in the cci index, which signals a regular bearish divergence. DeMarker Divergences. As we have already mentioned, the strategy is one of the simpler ones and therefore you only need to set the indicator period well in our case period 34 and then just wait for the CCI value to pass through the zero boundary see below - vertical line. A CCI forex trading strategy is generally used in one of the three ways outlined above.

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