The Commodity Channel Index (CCI) was made by Donald Lambert in 1980 as a tool in commodity trading. But in reality, this indicator can also be used for trading in all types of markets including forex. Lambert made the CCI to measure the difference between the middle price, price movements, and the average of the middle price in a certain time period.
cci indicator
What are CCI Indicators?
CCI is one of the leading indicators on Metatrader. CCI is classified as a group with the type of Oscillator along with RSI, MACD, etc.
The CCI reading is actually very simple: if the CCI signal is above 100, the price is uptrend. Conversely, if the CCI signal line is below the value of -100, then the price is downtrend. If described simply, then when the CCI signal line is directed upwards, it means that the market is in a bullish state. Conversely when the CCI signal line is directed downwards, it means the market is in a bearish state. But at present, CCI is actually used more often to see the level of market saturation.
cci-graphs
This CCI indicator chart consists of 3 components, namely:
CCI signal line
Overbought area
Oversold area
How to calculate CCI values
To calculate the value of the CCI indicator manually, several other calculations are needed such as the value of True Price, Simple Moving Average, and Standard Deviation. In simple terms, the following is how to calculate the value of the CCI indicator with the standard period
CCI = (TP - SMA (TP, 14)) / (0.015 x Mean Deviation)
TP = (High + Low + Close) / 3
Information:
TP = True Price, calculated from the average High, Low, and Close values.
High School (TP, 14) = Average TP value of the last 14 candles.
0.015 = Constants used for the scaling process. By including this constant value, the value of the CCI Indicator will always fall at a value of around -100 to 100.
Mean Deviation = Average of high school TP.
How to calculate:
Add the value of period 14 TP SMA.
Use absolute values to add this value so the results will be positive.
Then divide by 14 to get the average deviation value.
Quite complicated right calculation? But you don't need to worry if you use Metatrader 4, because you can get the indicator directly through the Insert menu> Indicator> Oscillator> Community Channel Index.
enter-cci-metatrader
(Read also: Ways and Guidelines for Installing Indicators in Metatrader)
How to Use the CCI Indicator
CCI calculates various kinds of average prices with variations in statistical methods. Complex calculation formulas make CCI indicators can be used in all market conditions.
1. How to Use the CCI Indicator to View Market Saturation Levels
In general, CCI is often used to see the level of market saturation (Overbought and Oversold). Overbought and Oversold is a condition for detecting a reversal or changing trends in the market. This condition will of course vary from each type of market.
In Overbought condition, the CCI signal line will be above +100, while in the Oversold condition, the CCI signal line will be below the -100 level. For more details, consider the picture below:
Overbought-oversold-cci
(Also read: Trading with Overbought and Oversold CCI Indicators)
But if you only trade using the CCI indicator without the help of other indicators, many false signals will appear which can result in losses. This can happen because CCI is a lagging indicator. So that the signal that is formed at the moment and which is formed during the closing of the candle can be different.
2. How to Use the CCI Indicator in the Following Trading Trend
In a market trip, prices will sometimes move to one side strongly and continuously. This situation is usually used by traders Trend Following to gain profits. However, trend movements in one direction are also usually accompanied by small corrections, which are usually called retracement. Post retracement occurs, prices will resume their journey.
By using the CCI indicator, this retracement can be detected. An example can be seen in a large upward movement that occurs in the H4 time frame in the following EUR / USD.
retrace-uptrend
In looking at the condition of the retracement prices, go down at one smaller time frame level. Suppose Overbought occurs on the H4 chart, then wait until the Oversold condition occurs in the H1 time frame. After reaching this Oversold condition, you can use candlestick confirmation as a strategy enhancer. This trading strategy can be used in various markets and time frames.
Consider the next example below. Downtrend occurs in the H4 time frame on the EUR / USD currency pair.
specify-retrace-h4
In seeing the condition of the retracement, go down
Linkback: https://www.forex.zone/forex-education/29/get-to-know-the-cci-indicator/749/
