Donald Lambert believed that every commodity or stock (not to mention Forex) moves in cycles where the high/low is established within a certain period of time. He therefore created the Commodity Channel Index strategy, also known as CCI, to have a mathematical formula to trade commodities. Since then many traders have been successful using this indicators on stock trading, futures trading and yes Forex Trading as well. The theory applies to all markets.
The Commodity Channel Index (CCI) Technical Indicator is one of the more advanced indicators especially in regards to the calculation. We wont bore you with the calculations so we will just tell the things you need to know. CCI is created so the majority (70-80%) of CCI is contained between -100 and +100. This makes CCI above +100 and below -100 interesting.
When CCI is above +100 it tells us that the instrument is in a strong uptrend and when CCI is below -100 in a strong downtrend. Donald Lambert then used the cross of these values as entries. Breaking up through +100 would be his buy signal and a cross down through -100 would be the sell signal.
How You Can Trade Your Favorite Forex Pairs Using CCI?
Entering trades the way Donald Lambert originally did is almost a sure way to lose money. This indicator on it’s own is not giving the trader enough of an edge so we have to apply some filters to it. One way you can get a better edge is by trading with the trend. So if the instrument is in a uptrend (defined for example with a moving average) you ignore the short signals and only take the long signals.
This mean when CCI crosses down through -100 you do not sell short. You wait for the CCI to cross up though +100 and then go long. Trading is often about finding out what suits your personality so therefore many traders has since the creation of CCI adapted the indicator and found new ways of trading Forex using CCI.
Two of the most common additional ways of trading using CCI is:
Many traders believe that after a strong trend (CCI above +100) then there can be a significant pullback so they look for entry when CCI moves back down below +100. This according to them signals a potential end to the trend. The opposite applies for -100. The traders look for long on a cross up through -100. To avoid too many fake signals these traders add divergence to the setup. This means they do not enter any trades unless a favorable divergence signal is present just prior to entry. CCI Overbought/Oversold
Some traders has adapted CCI into a bit more simple approach. They draw trendlines on CCI and trade the breaks of these trendlines. Again to avoid fake signals many people use either divergence like the above mentioned setup or they use the longer term trend as a filter.