The Commodity Channel Index (CCI) is a technical analysis indicator that is used to measure the momentum of a currency pair. It was developed by Donald Lambert in the 1980s and has since become a popular tool among traders. CCI is a versatile indicator that can be used to identify overbought or oversold conditions, trend reversal, and divergence. In this article, we will explain what CCI is and how it should be used on the forex chart.
What is CCI?
CCI is a momentum oscillator that measures the difference between the current price and the average price of a currency pair over a specified period. The indicator fluctuates between -100 and +100, with values above +100 indicating overbought conditions, and values below -100 indicating oversold conditions.
The CCI indicator is calculated using the following formula:
CCI = (Typical Price – MA) / (0.015 x Mean Deviation)
Where:
Typical Price = (High + Low + Close) / 3
MA = Moving Average
Mean Deviation = Average of the absolute differences between the Typical Price and the MA over a specified period.
The default period for CCI is 14, but traders can adjust this period to suit their trading style.
How to use CCI on the forex chart
CCI can be used in different ways on the forex chart, depending on the trader’s preference. Here are some of the ways CCI can be used to identify trading opportunities:
1. Overbought and Oversold conditions
When the CCI value is above +100, it indicates that the currency pair is overbought, and a reversal is likely to occur. Conversely, when the CCI value is below -100, it indicates that the currency pair is oversold, and a reversal is likely to occur. Traders can use this information to enter trades in the direction of the trend when the CCI value is in oversold or overbought conditions.
2. Divergence
Divergence occurs when the price of a currency pair is moving in the opposite direction of the CCI indicator. This can indicate a potential trend reversal. There are two types of divergence – bullish and bearish. Bullish divergence occurs when the price is making lower lows, while the CCI indicator is making higher lows. This can signal a potential uptrend. Bearish divergence occurs when the price is making higher highs, while the CCI indicator is making lower highs. This can signal a potential downtrend.
3. Trend following
Traders can also use CCI to identify the direction of the trend. When the CCI value is above zero, it indicates a bullish trend, and when it is below zero, it indicates a bearish trend. Traders can enter trades in the direction of the trend when the CCI value is above or below zero.
Conclusion
CCI is a versatile technical indicator that can provide valuable insights into market momentum. Traders can use CCI to identify overbought or oversold conditions, trend reversal, and divergence. However, it is important to note that no indicator is perfect, and traders should use CCI in conjunction with other technical indicators and fundamental analysis to make informed trading decisions. Additionally, traders should backtest their trading strategies using historical data before implementing them in live trading.
