A take profit is set at a distance of three times longer than the stop loss. You can also set a take profit at a strong resistance (for a purchase) or support (for a sale) level. Another option to exit a trade is when the CCI indicator reaches level +100 or -100, depending on the trade direction (buy or sell). In the fourth case, the CCI reaches level +200, and a bearish engulfing pattern appears in the price chart. The price chart makes low (4), lower than the preceding one (3), while the CCI makes low (4), which is higher than the previous one (3). Here emerges the bullish divergence, a strong signal to buy in technical analysis.
- The definition of overbought or oversold varies for the Commodity Channel Index (CCI).
- Everything depends on your investment objectives and trading skills.
- Reaching the downside limits of the oversold zone means the downtrend is weakening, and an ascending correction is about to start, or the ongoing trend might soon turn up.
- Lambert set the constant at 0.015 for scaling purposes, so that roughly 70% to 80% of CCI values would fall between −100 and +100.
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For convenience, I recommend that you also fill in the “Date” and “Open” columns with the corresponding date of the trading day and the opening price. To open a position in a correction, you must first wait for the CCI line to go beyond strong levels, and then return to them. After the price returns to the level of +200 or -200, you can open a trading position counter the ongoing trend. As the main idea of the CCI indicator, Donald Lambert used the idea of the market’s cyclical trends.
- However, there won’t be a disaster if you enter a sell trade in such a situation; you will just face a small loss within your CCI trading system.
- The 0.015 constant ensures 70 to 80 percent of CCI values fall within the +100 to -100 range.
- The best timeframe for trading with the commodity channel index CCI indicator is D1, but you can trade in a shorter timeframe as well.
- He initially developed the index to identify long-term cycles in commodity markets but has since been used by traders that have a short-term outlook on different securities.
- Before getting too excited about divergences as great reversal indicators, note that divergences can be misleading in a strong trend.
While divergences reflect a change in momentum that can foreshadow a trend reversal, chartists should set a confirmation point for CCI or the price chart. A bearish divergence can be confirmed with a break below zero in CCI or a support break on the price chart. Conversely, a bullish divergence can be confirmed with a break above zero in CCI or a resistance break on the price chart. The CCI can be adjusted to the timeframe of the market traded on by changing the averaging period.
Note that despite the name, the CCI can be used as an indicator for any market. You can also use it to get exposure to shares, forex and other markets with us. It was created by Donald Lambert and originally designed to identify cyclical turns in commodities. No matter your experience level, download our free trading guides and develop your skills.
In the third and fourth cases, there is a bearish divergence. The price chart hits a high, higher than the previous one, and the CCI makes a high (4) lower than the previous one (3). The position is opened based on the Railway Track candlestick pattern. A stop loss is always set according to the Price Action pattern rules.
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Using this method, CCI can be used to identify overbought and oversold levels. Finally, let us look at the gold futures chart GC, timeframe M5. To determine the overall global trend, you can use a simple moving average with a period of 200. A sign of a trend change will be the closing of the trading day below/above this moving average.
This scan reveals stocks that are in an uptrend with oversold CCI turning up. First, stocks must be above their 200-day moving average to be in an overall uptrend. Second, CCI must cross above -200 to show the indicator rising from oversold levels.
What pattern does the Commodity Channel Index identify?
Notice how Google kept on moving higher even after CCI became overbought in mid-September and moved below -200. The indicator is also lagging, which means at times it will provide poor signals. A rally to 100 or -100 to signal a new trend may come too late, as the price has had its run and is starting to correct already. Deepen your knowledge of technical analysis indicators and hone your skills as a trader.
However, I believe it is best to stick to the Dow Theory and identify the trend using key highs and lows in the daily chart. We need to know the high, low, and close of the last 20 trading days, including October 21st. That is, we need the data from September 26 to October 21, 2022, as Forex trading is closed at weekends. To find out these prices, just open any trading terminal and hover the mouse over the day you are interested in, and the trading platform will show all the necessary information.
If the indicator chart and the price go in opposite directions, there is a bullish or bearish divergence. At this moment, you should try to spot a pattern to trade, according, for example, to the Price Action. The price chart makes a new high, higher than the previous one, while the CCI makes a lower high. Let us explore an example of the USDJPY chart to see how the price chart is moving after the CCI reaches strong levels of overbought and oversold, + 200 and -200. This type of calculation can be useful for obtaining digital CCI values for each trading day. In the future, such digital CCI measures can be analyzed at your own discretion and used with another technical indicator reflecting the market state.