CCI indicator: what is it and how to use it? Combination of CCI and MACD indicators when trading on the Forex market

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

CTI, or the commodity channel index, was developed by Donald Lambert, a technical analyst who originally published an article about it in Commodities (now Futures) in 1980. Despite its name, CCI can be used in any market. And not just for goods. The indicator was originally designed to detect long-term trend changes but has been adapted by traders for use on time frames. Two strategies have been created using this tool. Both investors and traders can successfully use them.

CCI-indicator compares the current price with the average over a certain period of time. The indicator fluctuates above or below zero, turning into a positive or negative scale. At that time, most of the valuesabout 75% will be between -100 and +100. About 25% of them will fall outside of this range, indicating a large fall or rise in the price movement.

CCI indicator: description and essence

Like most oscillators, the CCI indicator was designed to identify overbought and oversold levels. It does this by measuring the relationship between price and the moving average (MA). Or, to be more specific, it shows normal deviations from this mean. Thus, the ITC is a classic oscillator that complements the MACD indicator. What is the best way to use such a chart?

One prerequisite for calculating CCI is the definition of the time interval, which plays a key role in improving the accuracy of the ITC. Since it is trying to predict the cycle using moving averages, the more fitted the moving average sums (averaged over the number of days) are to the time period, the more accurate the indicator will be. This rule works for most oscillators such as the MACD indicator. How to use its indicators in trading, you can learn when studying the basic "Forex" strategies.

How should the oscillator be tuned?

So while most traders use 20 as the default time frame for calculating CCI, a more accurate time frame reduces the occurrence of false signals.

Chart more oftenuses 30 periods in total when calculating CCI. Because the graph displays monthly information, each new calculation is based on data from the past thirty months. PKI 20 and 40 periods is also very common. The interval refers to those parameters of price charts that the indicator will necessarily include in its calculation. Value bars can be configured to display 60 seconds, five minutes, daily, weekly, monthly. Or at any time within the limits available on the charts.

CCI indicator: how to use it?

The longer the selected period (the more bars in the calculation), the less often the indicator will go beyond -100 or +100. Short-term traders prefer a shorter interval (fewer price scales in the calculation). It will provide more signals, while longer-term market participants and investors prefer a longer period (such as 30 or 40). Using a daily or weekly chart is recommended for long term trading. At the same time, short-term trades can use the indicator on an hourly or even a minute chart.

Calculations of the indicator are carried out automatically using specialized software or charting of the trading platform. All you have to do is enter the number of periods you want to use and select the time frame for your chart. For example, 4-hour, daily, weekly, etc. The main trading platforms and tools for the trader, includingThinkorswim and MetaTrader provide excellent performance for the CCI indicator. When it is above +100, the price is set well above the average. When the indicator is below -100, the cost is significantly lower than the main indicator.

Basic Strategy

Basic strategy TIC constantly monitors the CCI indicator. The setup should provide a move above +100 and generate buy signals. And also strive to move below -100 in order to activate sales. Investors can receive buy signals when they exit. And then reinvest when this signal repeats. ITC can also be used in several time periods. The long-term chart is used to establish the dominant trend, while the short-term chart is used to establish pullbacks and entry points to this trend. This strategy encourages more active traders to trade. And it can even be used to day sell for both the long term and the short term.

Ratio of market movements

Similar to the basic strategy, when the CCI moves above +100 on your long-term chart and the trend is up, you need to look for a short-term sell signal. The trend is considered until the moment when the long-term CCI indicator falls below -100. When using the daily chart as a short-term one, it is possible to make trades when the CCI drops below -100. And then sell when the indicator exceeds this mark. For Forex trading to besuccessful, exit as soon as CCI rises above +100. Then come back when that index drops. Alternatively, if the trend on the long-term CCI is turning down, set up an exit for all long positions.

When CCI is below -100 on a long-term chart, take only short sell signals on a short-term chart. A downtrend is valid for the long term CCI when the level rises above +100. You can customize certain rules in this strategy. For example, when using multiple timeframes, you can make your trading plan tighter by only taking short-term long positions when the long-term CCI is above +100. This will reduce the number of signals, but provide a general trend.

Desired additional settings

The entry and exit rules for shorter periods may also be adjusted. For example, if the long-term trend is up, you can set the CCI indicator to a shorter period to go below -100. And then go back above zero (instead of -100) before buying. This will likely result in a higher price. But it will offer more assurance that the short-term pullback is over and the longer-term trend will resume. After the exit, you can wait for the price to rise above +100. Then it will drop below zero (instead of +100) before closing long positions. Although trading in this case will be carried out through several small adjustments in the chart,such a move can increase profits during a very strong trend.

Flaws

Unfortunately, this strategy can produce several false signals or encourage losing trades when conditions turn out to be volatile. It is possible that the CCI-indicator may fail in terms of signal level. And this leads to losses or an unclear short-term direction. In such cases, you can trust the first signal as long as the long-term chart confirms your entry direction. The strategy does not include a stop loss, the use of which is highly recommended. It is he who allows you to reduce the risk to a certain amount. However, when buying, a stop loss on this system can be placed below the recent swing low.

Where can I use the oscillator?

CCI can be applied to any market. One time frame can always be successfully used. And trading with two will provide more signals. Especially this strategy is preferable for active traders. Use the CCI on a long-term chart to establish the dominant trend. And at the same time set it up for a shorter duration to isolate pullbacks and generate trading signals.

It must be remembered that strategies and indicators do not work without errors, like all tools for a trader without exception. Adjustments to the strategy criteria and indicator periods can provide better performance. While all systems can be subject to user misorientation, which results inlosing trades. Be sure to note that the implementation of the strategy does not support stop loss in its usual form. Therefore, you should definitely test this trading model with CCI: how profitable it is on the market at the moment. It is also important to study the possible dates and periods before using.