Woodies CCI indicator is one of the popular technical analysis tools. Traders can use the CCI indicator in trading currencies and other assets. Learn more about the definition and usage of this type of indicator with Forex Trading.
Overview of Woodies CCI indicator
In technical analysis, there are 4 groups of indicators including trend indicators, oscillator/momentum indicators, volatility measuring indicators, and support and resistance indicator. Woodies CCI indicator belongs to the group of oscillators.
What is Woodies CCI indicator?
Woodies CCI (Commodity Channel Index) is an indicator developed by Professor Ken Wood. Professor Wood has successfully applied the CCI indicator in finding market movement patterns. The CCI indicator shows the level of overbought or oversold. This is done by comparing the closing price and the moving average price over a certain period of time.
CCI exceeding (+100) or (-100) is a signal of overbought or oversold. The indicator at this level has a high possibility of trend reversal. To have the most comprehensive view of the market and make accurate decisions, you need to combine the CCI indicator with other technical analysis tools.
Application of Woodies CCI indicator
Woodies CCI indicator is used mainly in commodity markets. However, when trading stocks, forex and other assets, the CCI indicator is still very useful. Not only predicting market trends, CCI is also used for the following purposes:
- Identifying when the market will reverse: The CCI indicator can well identify the turning point of the commodity market. When the trading price exceeds -100 or +100 of the CCI, the market trend changes.
- Evaluating overbought and oversold conditions: An overbought CCI indicator (+100) is a sign that the market is in an overbought state. This sign has the potential for a downward correction. On the contrary, if the CCI indicator reaches (-100), the market will be in an oversold state and there is a potential risk of an upward correction.
- Supports making decisions when entering and exiting the market: Woodies CCI indicator signals an opportunity to buy when the price exceeds (+100) and sell when the price falls below (-100).
- Determine the market’s stability point: The indicator fluctuates around 0 for a long time, suggesting that the market may be in a stable phase.
Note: To build a trading strategy that produces good results, investors should not rely only on Woodies CCI but need to combine it with other technical analysis tools.
See more: Be more successful through this technical analysis
Formula to calculate CCI indicator
To calculate the CCI indicator, follow these 4 steps:
- Step 1: Determine the typical price over a certain period of time. A typical price is the average of three values: High, Low, and Closing price. Thanks to typical prices, investors can grasp the market trend. If the CCI shows that the current values are higher than the past then the price increases and the trend will also increase. Conversely, if the current value is lower than the past, the price decreases and the trend also decreases.
The typical price calculation formula includes the following values: High, Low, and Close in a certain period of time t. For example, on any trading day, if the high is 0.9878, the low is 0.9605 and the closing price is 0.9872, the typical price would be: (0.9878 + 0.9605 + 0 .9872) / 3 =. 0.9785.
- Step 2: Calculate the SMA of a typical price. SMA is the average of n typical prices in a certain period of time, with the following formula:
- Step 3: Calculate dispersion. Dispersion helps you identify overbought or oversold areas of the market. Dispersion is calculated by taking the average of the absolute deviation of the typical price from the SMA over n periods.
- Step 4: Calculate the CCI Indicator result.
Build a successful trading strategy with Woodies CCI indicator
For a successful trading strategy, investors should use CCI to interpret market trends. There are 4 ways you can take full advantage of the power of this indicator.
Identify buy and sell signals for your trading strategy using the CCI indicator
Before relying on CCI for trading, please clearly understand the nature of this indicator as an oscillator. This means the CCI indicator cannot provide information about global trends. If you only trade according to signals, you may not make a profit.
The best way to exploit the power of CCI is to combine it with other tools. For example, you can use moving averages or Dow theory to determine trends. Once you understand the main trend, using the Woodies CCI indicator will be much easier. You will identify buy and sell signals through the CCI indicator immediately afterward.
A buy signal appears when the indicator line crosses level 0 from below. At the same time, the market may have an upward trend. A sell signal appears if the indicator line crosses level 0 from above. At this time, the market may have a downward trend.
Identify overbought and oversold levels thanks to the CCI indicator
Trading by overbought/oversold zone is a method of determining market boundaries. The boundaries of price movements (bullish or bearish) are determined thanks to oscillators. When doing technical analysis and trading with CCI, overbought or oversold levels are (+100) and (-100), and stronger levels are (+200) and (-200).
If you are new, you should learn how to use these levels fluently before trying other levels. Experienced investors can apply the levels (+300) and (-300). However, CCI can only reach this level in short time frames or in highly volatile markets
When Woodies CCI indicator enters the overbought zone, investors need to be cautious. The reason is that this could be a signal that the uptrend is about to end and the market is reversing to decline. On the contrary, reaching the bottom of the oversold zone can signal that the downtrend is gradually ending. This could open up an opportunity for a recovery or a change in trend to an uptrend.
Identify bullish/bearish CCI divergence
In technical analysis, CCI bullish and bearish divergences act as important reversal signals. Divergence signals indicate the potential for a correction or change in price trend. Divergence only appears at the end of long-term price trends. If you see a divergence in the chart, you will likely make high profits.
Divergence occurs when the indicator and the price chart move in opposition to each other. There are 2 types of divergence: bearish divergence and bullish divergence. Bearish divergence occurs when the price makes a new high but the CCI is lower than the previous peak or repeats the same peak. Bullish divergence occurs when a security makes a new low but forms a higher low. This is a signal that the downtrend may be about to end.
If you want to enter orders based on divergence signals, first, you need to monitor the extreme points in the price chart and CCI chart. If these two charts are in opposite directions, a bullish or bearish divergence will appear. Now you must try to choose a pattern to trade, for example, Price Action.
The second is to determine the stop loss point based on the model rule where the position is opened. The take-profit level will be determined based on the order type (buy or sell): three times the length from the stop loss point or at a strong support/resistance position. Mastering the bullish/bearish CCI divergence will help you increase your chances of trading profitably.
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Forms of technical analysis combined with the CCI indicator
To have a successful trading strategy, investors need to combine Woodies CCI indicator with other technical analysis tools. Two indicators belonging to the oscillators group that are often combined with CCI are the MACD and RSI Trading Indicators.
Buy signal:
- The MACD line crosses above the signal line, predicting a possible upward price trend.
- RSI is out of the oversold zone (below 30) indicating a bullish reversal potential.
- The CCI indicator crossed the oversold threshold (-100), signaling that bullish momentum may appear.
Sell signal:
- The MACD line crosses below the signal line, showing that bearish momentum is forming.
- The RSI indicator dropped below 70, signaling possible bearish momentum.
- CCI fell out of the overbought zone (above 100), revealing the possibility of a bearish reversal.
summary
The article has provided information about the definition and usage of the Woodies CCI indicator. Hopefully, with the above sharing, you will understand the formula for calculating the CCI indicator. Besides, you can also start your first technical analysis experiences with CCI. Please follow the Forex Trading blog to update useful knowledge about investing.
FAQs
What tools is Woodies CCI indicator often combined with?
CCI is often combined with RSI, stochastic oscillator, MACD, Fibonacci Retracement, OBV, and Parabolic SAR.
What is the meaning of Woodies CCI indicator?
Woodies CCI Indicator helps measure the strengths/weaknesses of market trends. Traders can also use CCI to identify potential buying and selling points for commodities.
When should you use the CCI indicator?
Investors use CCI when they want to predict the trend of the commodity market. CCI can measure price fluctuations as well as the relationship between the current price and the average price over a specified time frame. The difference between the CCI value and important thresholds indicates the possibility of an increase or decrease in the price of a commodity product.
