The CCI indicator is an oscillator that measures the strength behind a price movement. At its simplest, it allows us to judge whether it is bullish or bearish forces that are in the driving seat. In this way, it has some strong similarities to the Momentum Indicator and both these indicators oscillate in value either side of a zero-value centreline.
Commodity Channel Index Indicator Explained
The momentum indicator is bounded within a point range either side of this line. In contrast, the CCI Index varies between greater maximum and minimum values than this, though and remain key values. Like many momentum oscillators, the CCI works by comparing the current price to some previous measure — and from that comparison, it decides how strong or weak the market is, relatively speaking. The CCI uses a moving average as its benchmark against which the current price is measured. The CCI is a relatively modern indicator, having been invented after the advent of the computing age.
It was, therefore, designed to be electronically processed from the get-go, in contrast to many older indicators that were originally calculated by hand. Consequently, the method of calculation is a bit more involved than those used for more venerable indicators. Furthermore, slight variations in the calculation method have been added over the years.
The following calculation method is the original CCI trading system detailed by its creator Donald R Lambert in The first step is to define a typical price. This is arrived at by calculating the arithmetic mean of the high, the low, and the close. The second step is to calculate a simple moving average of the typical price. In the original methodology, the moving average was calculated using a period of 20 days, but 14 is now more frequently used as the default.
The third step is to calculate the mean deviation from the moving average. Using these values, we then calculate the CCI using this equation:. Donald Lambert used the 0.
Values above or below are therefore unusual deviations from the mean. Now if this all seems a bit complicated, don't worry — MetaTrader 4 does all the heavy lifting for you. You decide on the number of periods, and MT4 CCI will perform all of the calculations for you in an instant.
This is how the indicator looks:. You can choose to alter the default settings. One way is to change the length of the number of periods, which is a critical factor when using the indicator. As we stated above, MT4 sets the default number of periods as Donald Lambert's original standard length was for 20 periods, though he viewed any value between 5 and 25 as useable.
If you set the period too low it tends to create a whipsaw effect in the index, and there is a danger that normal price fluctuations may look like tops and bottoms. The image below shows the chart with '5' chosen as the period value:. If you choose a period value that is too great, the result is a response time in the indicator that is too slow to provide you with timely signals.
Use the same rules for a SELL trade — but in reverse. In the figure below, you can see an actual SELL trade example. The overarching principles of the CCI strategy can be applied to your own trading strategy as well. All markets move in cycles, so we recommend using the CCI indicator in combination with higher time frames as this will yield better trading performance according to our backtesting results.
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Commodity Channel Index - Forex Trading Analysis
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CCI Indicator For Day Trading Forex
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Explanation
Info tradingstrategyguides. Facebook Twitter Youtube Instagram. But how we determine the dominant energy of the market? There is one more trading condition that needs to be satisfied before pulling the trigger.
See below: Step 2: Wait for a retracement and make sure that during that retracement the CCI indicator holds above the zero line. Here is the key. A good practice is to just add the CCI indicator to your charts and try which settings of the CCI indicator will suit your requirements. And if the CCI line crosses level of the indicator from downside to up, possible bullish signal is triggered.
Another way to trade CCI is called divergences. A divergence happens when there are two higher highs of a market, but the CCI indicator starts moving down the second high of the indicator is lower. This is called a bearish divergence.
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