Commodity Channel Index (CCI)
CCI is developed by Donald Lambert in the 1980s as an indicator to identify trends and measures the current price level relative to an average price level over a given period of time with a factor of 0.015 and normal deviations of the average price.
CCI = (Typical Price – X-period SMA of TP) / (.015 x Mean Deviation), Typical Price (TP) = (High + Low + Close)/3, Constant = .015
+100 and -100
These 2 levels give a strong indication of the trend of the currency. As the indicator surge above or below the -100 or +100, this show the strong price to start of a uptrend or downtrend. This is often use as a leading indicator to look for beginning of trend when the indicator crosses the hundred level. A buy or sell trades can be executed to catch the beginning of the trend.
The indicator when it is in an overbought or oversold condition which the slope of the indicator turning into opposite direction, will often signal the start of a trend reversal.
The gradient of the indicator also gives evident of the early momentum of the shift and the beginning of a trend in the making.
Double top or Double bottom
The indicator also works good with a price chart showing a double top or double bottom. By observing the crossing of 100 level and the slop of the gradient from 0 to +/-100, the appearance of double top and double bottom will help to trigger a buy or sell trade. This is more conclusive if happens in the overbought and oversold region (100 levels).
Trading within resistance and support
During low trading volume especially market close time where trading activities is at minimum, price that explicit side way movement will have CCI indication between -80 to +80 level. This is useful for scalping trading where few pips can be profited from currency moving sideways under this CCI indicator.
Mirror image of currency chart
CCI sometimes will be a mirror image of the currency trading chart itself. Especially when the high, low and close price are quite average and over time the movement of up and down are correspondently equal or close. Using this indicator can sometimes predict the price will go up after it touches the -100 line or the price will go down after it touches the +100 line. This allow trader to easily pickup trades to execute on an average trading hour daily.
CCI can be further used together with simple moving average and support and resistance level at a higher timeframe. Do explorer the various setups to achieve high probability trading success rate. The major currency I used to trade using commodity channel index are USDJPY, EURUSD, GBPUSD and USDCHF.