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CCI for determining the trends and reversals

As most traders know, CCI is Commodity Channel Index. The CCI Indicator is great for determining trends and reversals. Traders like it for versatility and simplicity.

No secret, that CCI is calculated with the following formula:
(Typical Price – Simple Moving Average) / (0.015 x Mean Deviation)

This indicator shows the direction of the trend and predicts its reversal. You can find the Commodity Channel Index among the standard tools offered by the Pocket Option.

More about CCI and How to Use it?

Donald Lambert developed it in 1980. Originally it was developed to spot long-term trend changes, later it was adapted for markets or timeframes. Trading with multiple timeframes provides more buy or sell signals for active traders. Traders often use the CCI on the longer-term chart to establish the dominant trend and on the shorter-term chart to isolate pullbacks and generate trade signals.

The Commodity Channel Index has a scale of 5 levels: -200, -100, 0, 100, 200 and the signal line. You can see the indicator under the price chart.

Traders need to set the period for CCI. The inventor of the indicator recommends setting the value to 20. If it is less, price fluctuations are too distracting. If it is more, contrary, the indicator will be not responsive. That is why it is good for a long-term trading.

The CCI compares the current and average prices over a period of time. The indicator fluctuates above or below zero, moving into positive or negative territory. While most values, approximately 75%, fall between -100 and +100, about 25% of the values fall outside this range, indicating a lot of weakness or strength in the price movement.

When the CCI is above +100, this means the price is well above the average price as measured by the indicator. When the indicator is below -100, the price is well below the average price.

To change the settings, click on the “Indicators” menu and find CCI.

Let’s discuss the basic rules for the Commodity Channel Index:

  1. An uptrend is expressed when the line is going up between the levels of -100 and 100;
  2. The down trend is expressed when the line is moving down;
  3. If the line moves between 100 and 200, it mean a market is overbought and an up reversal is coming soon;
  4. If the line moves between-100 and -200, then the market is oversold and the downtrend is coming soon.

How to trade with signals from CCI?

Thanks to the CII, you can determine the direction of the trend and its strength. Buy a contract at a time when the trend is just emerging and gaining strength to minimize the risk of “buy on a U-turn.”

Fortunately, the Commodity Channel Index determines the optimal entry point for a trade:

  1. Buy a Call when the line crosses the -100 from bottom to top.

  1. Buy a Put option when the line leaves the oversold zone, crossing level 100 from top to bottom.

As mentioned above, the indicator works great for the medium range trading (from 30 minutes to 4 hours). The expiration period should be equal to the formation time of at least 2 candles.

In general, you have to remember that different strategies can use the CCI in different ways, including using it across multiple timeframes to establish dominant trends, pullbacks, or entry points into that trend. Some trading strategies based on CCI can produce multiple false signals or losing trades when the market is choppy.

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