November 25, 2009
The CCI (Commodity Channel Index) Technical Indicator
The CCI indicator, or the Commodity Channel Index indicator to give it it's full name, is one of the more popular technical indicators amongst forex traders. It is basically an oscillating indicator that can be used to identify overbought and oversold conditions, and to identify new trends.
If you are using it to identify overbought and oversold conditions the common advice is that you should think about closing any long positions when the CCI indicator is above the +100 line, and consider closing short positions when the CCI is below the -100 line.
This is fairly basic stuff but I don't necessarily think that's the most effective way to use this particular indicator. For instance I know a trader here in the UK who looks to enter positions when these +100 and -100 lines are breached, particularly when they coincide with a new high or low.
For example if the price has just made a new high and the CCI has pushed through the +100 level, this often indicates a very strong upward trend. So rather than close any long positions or open any short positions, it's often a very profitable strategy to open a long position and buy into this strength. You can then think about closing your position when the CCI is above the +200 or +300 mark.
Another benefit of the CCI indicator is that it helps you to identify new trends. You will generally find that a new upward trend begins when the CCI crosses above 0, and a new downward trend begins when the CCI crosses down through the 0 line. Obviously the longer time frame you use, the more reliable this indicator will prove to be because the trends are more clearly defined.
If you want to take this a step further you can use the CCI indicator on multiple time frames. This is something I experimented with a few weeks ago. What I did was I plotted the 20, 60 and 200 period CCI, and I used the CCI(200) to indicate the trend - above 0 = bullish trend, below 0 = bearish trend - then I used the shorter term CCI indicators as my entry point.
In other words when the CCI crossed above 0 on the CCI(20) (and ideally the CCI(60) as well), I would open a long position, providing the CCI(200) was already above the 0 line.
Indeed I've just noticed there was a perfect set-up on the 5 minute chart of the GBP/USD pair earlier today. The CCI (200) has been comfortably above 0 since yesterday afternoon, and early this morning both the CCI(20) and the CCI(60) crossed above 0 at exactly the same time (06.10 UK time) before going up around 110 points.
I haven't really developed this trading system very much since I first experimented with it, but I definitely think it has a lot of potential, particularly as a short-term trading system.
One final way you can use the CCI technical indicator is to look for divergence patterns. I've already discussed CCI divergence trading once before, so I won't go into too much detail here, but if you use a couple of different CCI indicators and wait for divergence on both of them, you can often identify turning points in the market.
So the point I want to get across is that there are lots of ways you can use the CCI technical indicator when trading the forex markets.