Easily readable oscillator commonly used in forex markets to distinguish overbought and oversold zones. CCI was originally, as name suggests developed for trading commodities by D. Lambert, who realised that all markets are moving periodically and in cycles. As a forex indicator, CCI quickly gained popularity by effectively comparing relationship between currency pairs price, moving average of the price and standard deviation between them.
Anatomy of CCI forex indicator
Lamberts formula suggests using values above 100 and below -100 as entry signals. After position entry, Lambert also suggests, that we should wait for opposite CCI value to be reached for position exit signal.
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Using CCI forex indicator
When indicator reaches values over 100 market is considered overbought. Using CCI suggests long position entry as new trend might be at its beginning. (alternatively for -100 values). This feature works great with other trend confirming indicators (Moving Average). To follow the trend with CCI we enter the position once indicators value enters 100 zone.
In ranging forex markets, overbought CCI signal suggests selling, and oversold buying, as we expect price reversal of an instrument. Unlike in trending markets, we wait for CCI to return back to central zone (under 100 for sell, above -100 for buy) to enter the position. We exit position once we receive opposite position entry signal.
CCI can also be used to detect divergences on the forex market. Divergence is considered to be likely turning point for price movements. We can find divergence on the market, by simply comparing price to the CCI indicator. When price reaches new high in the uptrend and CCI fails to rise above its previous peak, divergence is in progress and we can expect price reversal.
Sell divergence: Price reached higher high. CCI reached lower high.
Buy divergence: Price reached lower low. CCI reached higher low.
CCI can be coupled with other oscillators such as RSI (relative stregth index) or Stochastic to determine cyclical trends. By using various combination of period length and oscillators, suitable entry point (peaks and valleys within the price) and trend can be detected.