4.36 How to Use Commodity Channel Index (CCI)


Commodity Channel Index aka CCI.


Here we add another oscillator to our list of money-making tools. Don’t worry that it’s called ‘commodity’ – it’s as easily applicable to Forex pairs as it is to pork bellies or corn!  Yes, you can use Commodity Channel Index, in short CCI, in any trading market.


It is easy to apply practically to your trading and works similarly to the other oscillators e.g. Stochastic and the RSI. Hence the trading approaches with CCI are similar to these other oscillatos.


Overbought & Oversold Zones with CCI


Commodity Channel Index (CCI) during a downtrend on a chart.


Similar to other oscillators you have come across earlier, the CCI can be a very useful oscillator, if used intelligently. When you see this indicator moving above the +100 level, you are in an overbought. When you see the indicator moving below the -100 level, you are in an oversold zone. The zone higher than +200 is extremely overbought. The zone lower than -200 is extremely oversold. However, as with any technical oscillator, we should not follow overbought and oversold signals for entry and exit when the trends are very strong. Precisely speaking, during strong trends, such oversold and overbought zones do not signal reversal, rather some amount of consolidation or correction.


Buy and Sell signals from CCI


The CCI gives a buy signal when it crosses the zero line from below. Similarly it gives a sell signal when it crosses the zero line from above.


CCI during an uptrend.


Once the CCI crosses +100, it means that a strong uptrend has been established and long positions should be maintained. In case the CCI crosses -100 on the downside, a clear downtrend is in progress, and short positions should be continued.


When the CCI enters a reading above +200, the market is extremely overbought and longs should be closed to book profit. At a reading below -200 the market is extremely oversold and shorts should be closed to book profit. Expect reversals from here on.


Caution While Trading with CCI


Just like and oscillator the following points are need to be kept in mind while you trade with CCI:


  • During very strong trends do not expect overbought and oversold signals to bring major reversal moves. Weaker trends are always better to trade on the basis of such signals.
  • Look for bullish divergences in the oversold zone and bearish divergences in the overbought zone.
  • Look for any support or resistance trend-line breakouts as confirmation for major reversals or corrections.
  • Keep an eye for the breakouts from any existing support or resistance levels to support the overbought or oversold signals. These could include physical levels as well as psychological levels.


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