Forex Education about Commodity Channel Index

The forex education where must have every trader is very important. Is absolutely necessary the full understanding of the utility and the way of use if not for all, at least, for the most important indicators. One of these indicators is the Commodity Channel Index.

The Commodity Channel Index (CCI) is an oscillator introduced in the 1980s and used by many traders to pinpoint market entries. Even though its name refers to commodities, CCI can also be used to trade currencies and other markets. Forex education informs us that traditionally CCI can be used in a variety of market conditions, including breakouts, ranges, and trends.   

The commodity channel index (CCI) is an oscillator indicator that helps for analyzing overbought and oversold conditions.

The commodity channel index (CCI) helps indicate the weakening or the end of a trend and a possible change in trend direction.

It helps you identify peaks or valleys in an asset's price. Normally 70% to 80% of the values tend to fall between overbought and oversold levels.

As with other overbought-oversold indicators, this means that there is a large probability that the price will correct to more representative levels. Knowing this, traders will wait for the indicator to stretch outside of these levels and will open new positions from the cross back inside the range.

The CCI indicator is usually presented on charts using a moving average type line.

According to forex education, a reading above +100 can indicate that an asset has been overbought, suggesting the price may start moving down. A reading below -100 suggests that an asset has been oversold and that the price may start moving up.

Traders will look to sell when the CCI indicates overbought conditions - entering when the indicator crosses the +100 back to the downside. Conversely, they will look to buy when the CCI indicates oversold conditions - entering their trade when the indicator crosses the -100 back to the upside.

I want to mention about technical indicators is that they are all lagging and are not to be used as decision-making tools. In other words, when they give their buy and sell forex trading signals, it will always be at least one candle after the optimal entry point in price.

So how can we use these indicators? They can be useful as a decision-support tool. Identifying divergence on an indicator or determining that you are in an overbought or oversold situation can help you identify high-probability opportunities in the markets when the price of an asset is at supply or demand.

Changing the CCI indicator settings

The standard setting on the CCI indicator is 14, meaning that it will measure recent price changes against average price changes over 14 time periods. This setting can be raised or lowered depending on your preferences.

A setting off fewer than 14 results in a more reactive indicator but the reading does not remain in either the +100 or -100 cycles for long. A higher setting means the CCI exceeds the +100 and -100 levels less frequently.

A setting of more than 14 results in a less reactive average that tends to touch or exceed the +100 and -100 levels far less frequently. When it does reach these extremes, however, it tends to remain there for longer.

When looking to change the setting it is important to bear in mind that having it set too low will result in a constantly changing reading, which can result in a higher number of false trading signals. When those signals are correct, however, it will get you into trends much sooner, resulting in larger profit potential.

Having the CCI set higher will result in the reading changing much less frequently. This will keep you in trades longer, helping to avoid false trading signals. However, your trade entry will come much later, resulting in a much smaller profit potential.

When changing the settings of the CCI it is important that you test whether your changes are actually improving or worsening the trading results of your forex trading strategy.

How to Use the CCI Indicator

Forex education can help us to understand that probably the best trading signal a trader could receive from the CCI is when it is showing divergence from price. In a strong uptrend where price is making higher highs and higher lows, the CCI should as well. If the price is reaching a supply zone, but the CCI is making the same or lower highs as it did on a previous price peak, then it is diverging, and that is a strong sell signal.

When we are looking to buy after a drop in price into a demand zone, we look for a divergence in the CCI where it fails to make lower lows while price does.

The primary way of timing entries with CCI indicator in a downtrend is to wait for the indicator to move above the +100 (overbought) and cross back below +100. This creates an opportunity to sell the currency as momentum is returning back in the direction of the trend.

Place your stop-loss just below the swing high. Look to take profits at least twice the distance to your stop-loss so you are maintaining, at least, a 1:2 risk-reward ratio.

The forex education for us is very important. For this reason, we recommend to all traders to study the indicator Commodity Channel Index in order to realize all the possibilities who offers for a successful trading decision.

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