Forex buffalo forum-Commodity Channel Index in Forex Trading

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2. Commodity Channel Index

3. OVERVIEW
• The Commodity Channel Index oscillator
measures the position of a currency’s price with
respect to its moving average. This is useful for
traders as it can be used to highlight when the
market is overbought or oversold or to help
signal when a trend is weakening. Despite its
name the indicator is also widely used in the
currency and equities markets.

4. CALCULATION
• Below is an example based on a 20-period
Commodity Channel Index (CCI) calculation.
The number of CCI periods is also used for the
calculations of the simple moving average and
Mean Deviation.
• CCI = (Typical Price - 20-period SMA of TP) /
(.015 x Mean Deviation)
• Typical Price (TP) = (High + Low + Close)/3
• Constant = .015

5. calculating the Mean Deviation
There are four steps to calculating the Mean
Deviation.
1. Subtract the most recent 20-period average of
the TP from each period's TP.
2. Take the absolute values of these numbers.
3. Sum the absolute values.
4. Divide by the total number of periods (20).

6. TRADING WITH THE COMMODITY CHANNEL INDEX
• The Commodity Channel Index (CCI) indicates when a
price is high or low compared to its statistical average,
this helps traders gain insight into how extreme the
current price action is in context of the past price action.
It is used as an overbought/oversold indicator similar to
other indicators such as the Relative Strength Index
(RSI).
• Overbought and oversold indicator lines are placed at
100 and -100 respectively. The CCI can be a highly
volatile indicator, which can cause numerous whipsaw
trades, it is therefore important to exercise disciplined
risk management strategies when utilizing it.

7. TRADE SIGNALS
• Buy signals
• Buy signals are given if the CCI rises up
through -100, the signal would typically be more
reliable in ranging markets and if the CCI has
spent a number of time periods under -100.
Traders may also wish to buy again when the
CCI rises up through +100 as the momentum
gains intensity , covering longs when it falls
back through +100.

8. TRADE SIGNALS
• Sell signals
• Sell signals are given if the CCI moves down
through 100, the signal would typically be more
reliable in ranging markets and if the CCI has
spent a number of time periods above 100.
Traders may also wish to sell again when the
CCI falls below -100 as the momentum gains
intensity, covering shorts when it rises back
through -100.

9. TRADE SIGNALS
• Divergence signals provide more powerful
signals but occur less frequently, they are
normally used to trade intermediate price cycles
in a trending market. A buy signal is given when
there is a bullish divergence between the CCI
and price, sell signals are given when there is
bearish divergence between the CCI and price.

10. CCI Image

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