CCI indicator (Commodity Channel Index) belongs to the group of oscillating indicators. It is widely used in technical analysis. CCI is a useful tool to predict market trends and is highly effective when the market has strong fluctuations. So, in this article, Forex Trading will help you clearly understand what CCI is and how to use it to achieve maximum profits.
Meaning of CCI in technical analysis
CCI is the commodity channel index, a type of oscillating indicator invented by Donal Lambert in 1980. Initially, CCI was developed to analyze commodity markets. But now it has been widely used across various asset classes such as stocks, forex and more.
Similar to the MFI indicator, the CCI indicator is used to monitor market trends and detect overbought and oversold times. Additionally, traders can also use CCI to spot weaknesses in trends. By looking at the divergence between price and indicator. This helps users make decisions about closing orders or opening orders according to new trends.
In addition to using the CCI to identify overbought and oversold conditions, traders can use the RSI line to measure the strength of a trend. So what is the RSI indicator? It is a momentum oscillator used to measure the velocity and magnitude of price movements. That is, consider whether the market is in a strong or weak trend.
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Characteristics of CCI in technical analysis
To help everyone have a clearer view of the Commodity Channel Index (CCI). Below are some outstanding features of CCI that Forex Trading will present:
CCI fluctuates between -100 and +100 on the technical chart
In a stable and not very volatile market, the CCI indicator usually moves near the zero axis. CCI represents the average price. This zero axis is a reference line for the average price.
When the price moves between 0 and 100. This is a signal that the market is trending up. On the contrary, if the price goes from 0 to -100, the current market forecast trend is down.
CCI exceeds the -100 and 100 range on the technical chart
CCI can cross the range of -100 and 100. Its role depends on the analysis of past data and future forecasts.
- When CCI surpasses 100: This is a signal that the market is trending strongly up. The price is likely to start a new upward momentum.
- When CCI crosses -100: This is a signal that the market is weakening and starting a downtrend.
However, CCI also has a role in future forecasts:
- When CCI surpasses 100: This is a signal that the market has increased too strongly and has a tendency to adjust downward. Could indicate that the pair is in an overbought state.
- When CCI exceeds -100: This is a signal that the market has fallen too far and has an upward correction trend. Could indicate that the pair is in an oversold state.
However, CCI often performs best in sideways markets. Meanwhile, when the market moves in a trend market, CCI cannot take advantage and is often limited.
Detailed calculation formula CCI indicator.
To apply CCI to forex trading effectively, traders need to master the calculation. By understanding the CCI calculation formula, traders will have a more complete view of the indicator. And have the ability to use it in your trading decisions.
- CCI = (( AP- MA) / MD ) x ( 1 / 0,015)
In the formula:
- AP (Average price): Calculated by taking the sum (highest price + lowest price + closing price). Divide by 3, to obtain the average price of the asset.
- MA (Moving Average): Is a simple moving average of price. Calculated by summing the closing prices and dividing by the number of data points.
- MD (Moving Deviation): Calculated by taking the absolute standard deviation of MA compared to the average price AP. Then calculate the average of these deviations.
- 0.015 is the constant used to adjust and smooth the value of CCI. It is used to ensure that it is between -100 and +100.
Although the calculation formula looks complicated, there is no need to worry too much. Because now forex trading platforms have built-in CCI indicator. Therefore, traders do not need to calculate this indicator manually anymore.
Installation instructions CCI indicator on MT4 and Tradingview
Below, Forex Trading will guide you on how to install CCI on two trading platforms, MT4 and Tradingview.
How to install the CCI indicator on the MT4 platform
To install CCI on the MT4 platform, follow these steps:
Chọn Insert -> Indicators -> Oscillators -> Commodity channel index (CCI) trong MT4.
After you select Commodity Channel Index, the Commodity Channel Index dialogue box will appear as shown below. In the dialogue box, you will see the Parameters section consisting of two main sections: Period (time frame) and Apply to (applicable price type). MT4 name, the default value for a timeframe is 14. But you can adjust it to suit the market conditions you are trading.
Choosing the right timeframe is important with most indicators. Too short a time frame can create many fake signals. While a time frame that is too long can make the indicator lag behind market movements.
Adjust the time frame to suit your trading strategy. Also, note increasing the indicator’s timeframe when you see the CCI regularly exceeding the -100 and +100 range.
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How to install the CCI indicator on the Tradingview platform
To launch CCI indicator on TradingView, you can follow these steps:
Immediately access the Tradingview platform, then select “Charts” on the menu bar. Select the currency pair you analyze. Then tap on the “fx” icon (indicators) and search for the Commodity Channel Index (CCI) indicator.
To adjust the parameters to suit your trading strategy, click the cog icon (Settings). The CCI indicator dialogue box will appear. It allows you to enter appropriate values in data fields. When finished, click OK to save the settings.
Thereby, you have successfully launched CCI on TradingView according to your request.
How to trade with the basic Woodies CCI indicator
We can see that the important function of CCI is to compare the current price with the average price. It manifests itself over a certain period of time. Investors have come up with a simple trading principle with CCI:
- When the CCI increases, and the CCI line crosses the +100 mark, it shows that the market is in an uptrend. When this situation occurs, investors can open a buy order. Then, when the CCI drops below the +100 mark, they can close the order.
- On the contrary, when the CCI decreases and the CCI line falls below -100, it shows a downtrend. Investors can open sell orders to make profits. Then, when the CCI increases and crosses the -100 mark, the sell order can be closed.
Currently, many investors use the -200 and +200 ranges as overbought and oversold signals. The CCI index approaches the -200 or +200 mark. The possibility of mean reversion is high.
Epilogue
The above article Forex Trading has provided important information and an overview of the CCI indicator. Hopefully, through this article, traders have a clear understanding of what CCI is, and how to install and use CCI to achieve the most optimal profits. Wishing investors success in their trading!
Frequently asked questions
Should CCI indicators be combined with other tools?
Investors should combine CCI with other technical analysis tools. When the price enters the overbought or oversold zone, factors need to be considered before confirming a price reversal.
Trend indicators like Simple Moving Averages. Entry point indicators like Price Action work well with the CCI indicator. When combined with CCI, you can achieve the best profit/risk ratio.
How to identify trends through CCI
To identify trends, one needs to apply classic price chart analysis principles or use additional tools. This is very important to avoid falling into the trap of false signals sent by the oscillator. When the trader clearly understands the prevailing market trend, the signals from the CCI will bring profits.
How do traders use the CCI indicator?
CCI is often used as an oscillator to find overbought and oversold areas in the market. In addition, this indicator also allows trading in trends and corrective waves.
