The ITC, or commodity channel index, was developed by Donald Lambert, a technical analyst who originally published an article about this in Commodities (now Futures) in 1980. Despite its name, CCI can be used in any market. And not only for goods. The indicator was originally designed to identify long-term trend changes, but was adapted by traders for use on a time frame. Using this tool, two strategies have been created. They can be successfully used by both investors and traders.
The CCI indicator compares the current price with the average for a certain period of time. The indicator fluctuates above or below zero, turning into a positive or negative scale. At that time, most values, approximately 75%, will be in the range of -100 to +100. About 25% of them will go beyond this range, which indicates a large drop or increase in the movement of prices.
CCI indicator: description and essence
Like most oscillators, the CCI indicator was designed to measure overbought and oversold levels. He does this by measuring the relationship between price and moving average (MA). Or, more specifically, it shows normal deviations from this mean. Thus, TIC is a classical oscillator that complements the MACD indicator. How to use such a chart most correctly?
One prerequisite for calculating CCI is to determine the time interval, which plays a key role in improving the accuracy of ITC. Since he is trying to predict a cycle using moving averages, the more adapted the moving averages are (on average by the number of days) to the time period, the more accurate the indicator will be. This rule works for most oscillators such as the MACD indicator. How to use its indicators in trading, you can learn when studying the main "Forex" strategies.
How to adjust the oscillator?
Thus, although most traders use the default number 20 as the time interval for calculating CCI, a more accurate period reduces the appearance of false signals.
The chart most often uses 30 periods when calculating CCI. Since the graph displays information for the month, each new calculation is based on data from the last thirty months. TECs of 20 and 40 periods are also quite common. The interval refers to those parameters of price charts that the indicator will necessarily include in its calculation. Columns with cost marks can be configured to display indicators in 60 seconds, five minutes, daily, weekly, monthly. Or anytime within the frames available on the charts.
CCI indicator: how to use it?
The longer the selected period (the more bars in the calculation), the less often the indicator will go beyond -100 or +100. Short-term traders prefer a shorter interval (fewer price scales in the calculation). It will provide more signals, while longer-term market participants and investors prefer a longer period (such as 30 or 40). Using a daily or weekly chart is recommended for long-term trading. At the same time, short-term deals can be applied by the indicator on the hourly chart or even minute.
The calculation of the indicator is carried out automatically using specialized software or charting the trading platform. You only need to enter the number of periods that you want to use and select the time frame for your chart. For example, 4-hour, daily, weekly, etc. The main trading platforms and tools for the trader, including Thinkorswim and MetaTrader, perfectly provide the CCI indicator. When it is above +100, the price is set much higher than average. When the indicator is below -100, the cost is significantly lower than the main indicator.
Basic strategy
The basic ITC strategy constantly monitors the CCI indicator. The setup should provide a promotion above +100 and generate buy signals. And also strive to move below -100 in order to boost sales. Investors can receive buy signals when they exit. And then reinvest when this signal repeats. ITC can also be used in several time periods. A long-term chart is used to establish a dominant trend, while a short-term chart is used to establish pullbacks and entry points into this trend. This strategy facilitates the trading of more active traders. And it can even be used for daily sales both in the long term and for a short time.
The ratio of market movements
By analogy with the basic strategy, when the CCI moves above +100 on your long-term chart and the trend goes up, you need to look at the short-term sales signal. The trend is considered until the long CCI indicator drops below -100. If you use the daily chart as short-term, you can make deals in cases where the CCI falls below -100. And then sell when the figure exceeds this mark. For Forex trading to be successful, exit it as soon as the CCI rises above +100. Then go back when this index drops. Alternatively, if the trend on the long-term CCI turns down, adjust the exit to all long positions.
When the CCI is below -100 in the long-term chart, only accept short sell signals in the short-term chart. The downtrend is valid for the long term CCI, when the level rises above +100. You can configure specific rules in this strategy. For example, when using several time frames, you can make the trading plan more rigid only by taking long positions for shorter periods when the long-term CCI is above +100. This will reduce the number of signals, but will provide a general trend.
Desired advanced settings
Entry and exit rules for shorter periods can also be adjusted. For example, if a long-term trend goes up, you can set the CCI indicator for a shorter period to drop below -100. And then go back above zero (instead of -100) before buying. This is likely to lead to a higher price. But it will offer more guarantees that the short-term pullback is over and the longer-term trend will resume. After the exit, you can wait until the price rises above +100. Then it will go below zero (instead of +100) before closing long positions. Despite the fact that trading in this case will be carried out through several small adjustments in the chart, such a move can increase profits during a very strong trend.
disadvantages
Unfortunately, this strategy can produce several false signals or encourage the execution of losing trades when conditions turn out to be unstable. It is possible that the CCI indicator may malfunction in signal strength. And this leads to losses or an unclear short-term direction. In such cases, you can trust the first signal as long as the long-term chart confirms your direction of entry. The strategy does not include stop loss, the use of which is highly recommended. It is he who allows to reduce the risk to a certain amount. However, when buying a stop loss in this system can be placed below the recent minimum swing.
Where can I use the oscillator?
CCI can be applied in any market. One time frame can always be used successfully. And trading with two will provide more signals. This strategy is especially preferred for active traders. Use CCI on a long-term chart to establish a dominant trend. And at the same time, tune it for a shorter period to isolate kickbacks and generate trading signals.
It must be remembered that strategies and indicators work not without errors, like without exception all the tools for a trader. Adjustments to strategy criteria and indicator periods can provide better performance. Although all systems may be subject to incorrect user orientation, which is why unprofitable transactions occur. Be sure to keep in mind that the implementation of the strategy does not support stop loss in its usual form. Therefore, you should definitely test this trading model with CCI: how profitable it is in the market at the moment. It is also important to examine the possible dates and periods before use.