Last time out in part one we took a look at the Stochastic Oscillator; this week, we will be looking at a similar type of indicator, the Commodity Channel Index (CCI). Introduced in 1980 by Donald Lambert, and although it’s name is suggestive of commodity trading, it certainly is useful in the Forex world as it is a very useful analytical tool for identifying cyclical trends in markets. Let’s have a look at what it looks like:
Here we are looking at a 15 minute chart of EUR/USD. On the bottom of the chart is the CCI. On this flavor of CCI, colors are used to enhance potential trade signals. You’ll notice that the red (bearish) zone on the left of the chart is separated from the blue (bullish) zone on the right by a gray area, suggestive of a “do not trade” period. I must confess, this is one of my favorite oscillators, and I use it quite a bit.
Okay, so let’s get down to the nuts and bolts. The CCI typically oscillates above and below its zero line, normally within a range of +100 and -100 (dotted red lines). The common interpretation is that the market is in a strong bullish trend as the CCI crosses above 100 and remaining there would be considered to be “overbought”. As the CCI falls below the 100 line, we would be looking at a reversal (signaling the beginning of a bearish trend). Conversely, as the market falls below the -100 line, we’re looking at a strong bearish trend, the market considered to be “oversold” as it remains below -100, and crosses back above it.
Now as we continue to examine this chart, we see this CCI colors its bars red when they are below the zero line and blue while they’re above it. Notice that as the bars cross above the zero line, we can see price action moving in a bullish trend, with the market flattening out as the CCI dips down below 100. Now let’s look at it in conjunction with another indicator
Again we are looking at a 15 minute chart of EUR/USD. On the upper part of the chart we have two moving averages, a 12 EMA (red) and a 26 EMA (blue). They cross on the left side of the chart, signaling a bearish move. Around the same time the CCI flips below the zero line, but in the case of my “special” CCI, the bars are colored gray and it’s telling me “no trade”. And rightfully so, as the market spikes upwards briefly before resuming its strong downward trajectory. Now in this example the moving averages do accurately reflect a strong downward movement, but filtering it with the CCI gives us the opportunity for a better entry (well, at least my special CCI does). For my money a pending order just below the 12 EMA is just what the doctor ordered, as I hate to enter an EMA cross trade too early. It’s a winning trade either way, but my way I don’t have to deal with as much uncertainty caused by the trade moving against me 15 pips had I entered this one right after the EMA cross. The main takeaway here is that the EMA cross to the downside coupled with the CCI flipping to the downside equals strong sell signal.
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That’s all for now – next time I will take a break from charts and strategies and talk about some other aspects of currency trading. Until then have a great week, and thanks for reading!
PS – for those of you who can’t get enough Pipsqueaks, I now have my own blog; check it out here at https://www.forex-pipsqueaks.com/