In the figure below, you can see an actual SELL trade example. Use the same rules for a SELL trade – but in reverse. The first sign that the rally is running out of steam is when the CCI indicator crosses below the zero line. We have two trading tactics to implement when dealing with exits. We’re proposing a very bitbuy canada review easy strategy to manage your stop loss. If the retrace was weak, it means the dominant energy of the market remains up.

Divergence-based setups

  • I have plotted a 20 period simple moving average on price and the CCI 20 in the lower pane.
  • Settings can be adjusted for different time horizons.
  • To truly master technical analysis, you need to understand price action and market structure.
  • In this situation, I recommend exiting the trade, even if there is a loss, as the conditions for holding the position are not met, and the indicator generates an opposite signal.
  • Only approved traders or experienced traders are allowed.
  • The theory is that these breakouts confirm strong trending momentum.

A few days later, the price pulls back and CCI falls. One day, the price spikes up sharply and CCI soars to +250. The stock price has been rising steadily for months. CCI has been trending downwards, reaching below -100.

How the Professional Traders use the CCI Indicator Strategy

  • The main thing is to carefully monitor the incoming signals sent by the CCI indicator and find discrepancies between the price chart and the indicator chart.
  • To define the trend, one should be guided by the principles of classic chart price analysis or apply supplementary tools.
  • The basic concept of the CCI indicator is simple.
  • The RSI is often better for identifying overbought/oversold conditions in a range.
  • The Commodity Channel Index could be used as an independent trading system or as an oscillator to supplement the trading strategy.

Every time the indicator breaks above +100, the uptrend momentum begins, and vice versa. As we mentioned above, there are several ways to use the CCI indicator to find trading signals. For those unfamiliar with the term, divergence in trading is a situation of miscorrelation between the price of an asset and the indicator. Divergence is another way to use the CCI indicator to find trading signals.

I prefer to add a trailing stop once the price moves in my favor. We start looking at the CCI chart, to spot a crossover with the 200 EMA. fx choice review The Keltner Channel’s slope is pointing downwards, so we are looking to short the market. Let’s look at some charts to see this setup in action.

Overbought and oversold levels

In the second case, the CCI indicator reaches level – 200, and there is a Bullish Engulfing pattern in the chart. In short timeframes M1 – M15, there is more so-called market noise, so it is not always possible to determine the general trend for the instrument. However, in day trading, there are more false signals.

However, you should also use additional analysis tools to watch for signs of trend exhaustion or reversals. Another common approach is to use the CCI to confirm the strength of a trend. This crossover can be taken as a signal to consider buying. The CCI drops below -100, indicating that the stock might be oversold.

Check out my complete price action trading course and market structure guide to build a comprehensive trading approach. Remember, successful trading isn’t about finding the perfect indicator, but rather understanding how to use your tools in harmony with market dynamics. Lower timeframes (15-min to 1-hour) offer more signals but with increased noise. The key to avoiding false CCI signals is never using the indicator in isolation. No indicator strategy is complete without proper risk management.

For swing traders or long-term investors, a longer period is better. For day traders or scalpers, shorter periods can be used. It often signals a coming price reversal to the upside.

How the Indicator Works

Now, day trading is all about getting in and out of the market fairly quickly. In this regard, we don’t want to lose any more time and we jump into the market knowing that we have multiple factors in our favor. When the CCI crosses above the -100 level we know that the market is starting to shift to the upside. In other words, we need the price to make lower lows while the CCI indicator has to do higher lows. The second condition is that we need divergence between the CCI and the price.

Donchian Channel Indicator – Trading Strategies

Let’s see how to read the CCI indicator if you’re a complete beginner. You have to keep in mind that technical indicators are just mathematical equations. However, it tends to perform the same in the stock market or the Forex currency market and even the cryptocurrency market for that matter. We also have training on how to use currency alpari review strength for trading success.

I have plotted a 20 period simple moving average on price and the CCI 20 in the lower pane. The indicator can be considered a detrended moving average oscillator. The calculation that includes the .015, is designed to ensure that the majority of the time, the levels of +100 and -100 contain price.

A bullish divergence happens when the price makes a lower low, but the CCI indicator makes a higher low. It is moving much lower than its average, signalling that a bounce or reversal is coming. When the CCI moves above +100, it signals overbought conditions. It measures the difference between a price and its moving average.

The CCI indicator is available in any popular trading platform, and if you need to calculate the indicator value manually, you can use an Excel spreadsheet. It is also necessary to take into account important financial news, they can bring significant price fluctuations and changes in the technical analysis picture of the market. Signal number 2 doesn’t work, the price doesn’t go in the needed direction, and the trade is exited with a loss. An entry signal is sent when the CCI crosses the zero level downside. Finally, let us look at the gold futures chart GC, timeframe M5. The price chart hits a high, higher than the previous one, and the CCI makes a high (4) lower than the previous one (3).

Additionally, consider experimenting with different CCI settings to find what works best for your trading style. Therefore, it’s crucial to use the CCI in conjunction with other analysis methods and risk management strategies. While the CCI is a valuable tool, it’s essential to remember that no indicator is perfect. Traders can look for buying opportunities during pullbacks, with the aim of riding the upward momentum. Similarly, long positions can be initiated when the CCI crosses above the -100 level, with a target of closing the position when it returns below.

The price movements in blue-chip stocks and major indices occur at a slower pace because these markets remain stable. The practice of entering trades whenever CCI crosses a level will result in numerous small trading losses. The indicator becomes more effective for your trading needs when you modify its parameters to match your market preferences and trading approach. The CCI indicator requires users to adjust its default parameters because these settings fail to deliver optimal results across all trading assets and time intervals. The trader understands that the brief market increase has ended because the downtrend will likely continue. The price reaches its support level before the CCI indicator crosses below -100 then returns above this threshold.