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Practical applications of the Commodity Channel Index

Trading

8 min read

The Commodity Channel Index (CCI) is an indicator of technical analysis of the oscillator type. It is used to identify the emerging trend and determine the levels of overbought and oversold. The indicator was presented for the first time in 1980 by Donald Lambert in the magazine Commodities. Originally developed to identify cycles in commodity trading, it is currently applied to a broad range of assets.

CCI as displayed in the IQ Option trading platformThe CCI displayed on the IQ Option trading platform

The CCI compares the current price with the average prices of a given time interval. When current prices exceed the average level the CCI is relatively high. Otherwise, when current prices are below the average value of the period, the KIC is relatively low. The indicator, therefore, provides the necessary means to identify the levels of overbought and oversold.

The logic behind it

The ICC measures the difference between the change in the current price and the change in the average price of the underlying asset. When prices are above the average level, the indicator reading tends to be high. When prices are below the average level, the reading will apparently be low.

The Commodity Channel can be used either as a leading indicator, or as an anticipator, or as an additional indicator. When used as an early indicator, traders try to track overbought and oversold levels, as well as up and down divergences, to predict the next trend reversals.

When using the CCI as an additional indicator, peaks above +100 may indicate a strong price action towards a bullish movement. The falls above -100 may on the contrary indicate a weak price action and a possible downward trend.

Reverse points on the CCI graphReverse points on the CCI chart

How do you set up?

Setting up the Commodity Channel Index on the IQ Option platform is extremely simple.

1. Simply click on the "Indicators" button at the bottom left of the screen. Then select CCI from the list of available indicators.

Setting up the indicator. Step oneSet the indicator. Step 1

2. Then click on the "Apply" button if you wish to use the indicator with the standard settings.

3. You can also adjust the parameters to your liking. Note that, if used with standard parameters, 70 to 80% of the CCI readings will fall between +100 and -100. The shorter the reference period, the more volatile the CCI will be, with a smaller percentage of values ​​between +100 and -100.

Setting up the indicator. Step twoSet the indicator. Step 2

How to use it in trading?

New trend

As previously mentioned, between 70 and 80% of the readings are within the range -100 / + 100. The fact that the price comes out of this range can be interpreted as an invitation to enter. If the indicator crosses the +100 limit from below, an upward trend can be expected. Due to the "delayed" nature of the ICC, the upward trend may have already ended. In this case, the trader's goal is to determine the strength of the trend. And, if the trend proves stable, establish how long it will last.

A bullsih trend identified by CCIAn upward trend identified by the ICC

Similarly, if the -100 line is intersected from above, a downtrend can be expected.

A bearish trend identified by CCIA downward trend identified by the ICC

Overbought / Oversold

The ICC is an indicator without limits, which makes the identification of overbought and oversold levels slightly complicated (but not impossible). The underlying asset may continue to lose value for a long time after the entry of the ICC into the oversold zone, or increase in price even if the CCI has remained in the area of ​​overbought for some time.

The selection of overbought and oversold levels depends on the market and the asset in question. On the Forex market it is widely accepted that the underlying asset becomes overbought when the CCI indicator exceeds the +200 level, a difficult point to reach. Similarly, if the CCI falls below -200, the asset is considered oversold.

An overbought position identified by CCI and a subsequent bearish trendAn overbought position identified by the ICC and the subsequent downtrend

Divergences

If the directional momentum does not confirm the price, a quick reversal can be expected. When the ICC forms a greater minimum and the underlying asset reaches a lower minimum, an upward divergence occurs. Downward divergence appears when the ICC forms a lower maximum and the underlying asset reaches a higher maximum.

Divergence as a harbringer of trend reversalThe divergence as an announcer of the inversion of the trend

It should be noted that during a strong trend, divergences can be misleading.

Conclusion

The Commodity Channel Index is a very versatile technical analysis tool, used by many traders to identify emerging trends and determine levels of overbought and oversold. The CCI offers an excellent mix of precision and analysis potential. The ICC signals should be confirmed by other indicators.

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This article does not represent an investment advice. Any reference to past movements or price levels is informative and based on external analyzes, we do not provide any guarantee that such movements or levels may reoccur in the future. In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.

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CFDs are complex instruments and carry the high risk of losing money quickly due to the leverage effect. 76% of retail investor accounts lose money when trading with CFD through this provider. You should make sure you understand how CFDs work and if you can afford to take the high risk of losing your money.


Source: IQOption blog 2018-11-24 10:23:31

PLEASE NOTE: The articles on this website are not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.

In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.

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