How to Trade the CCI Indicator

 


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The CCI (Commodity Channel Index) is one of the most popular trading indicators used today. It was first developed by Donald Lambert and presented in Commodities magazine at October 1980. Since then it has grown in popularity and is one of the most used indicators, due to its simplicity and accuracy of signals. In this article we will present several methods of trading with it for extreme profits.

The CCI, basically measures the distance between the moving average, or in other words, the variation from the statistical mean. It uses the Typical Price = the average of high, low and close price. This value is scaled to show it on a more consistent scale, so it can be used objectively. The more precise formula is a bit more complicated but not important for most traders: it is enough to remember that it shows the average distance from the moving average.

The first way to trade the CCI indicator is when it crosses the overbought\oversold levels: when it crosses the 80 level from above it is a sell signal and when it crosses the 20 level from below it is a long signal. Some traders even trade when the CCI hits an extreme level (200 or -200, 300 or -300) and just creates one bar in the opposite direction. This is also a powerful signal that is not cross-based but can get amazing reversal signals easily. This is the classic way that the Commodity Channel Index is used for reversal trading.

The Commodity Channel Index can also be traded in a trend-following fashion: when the index of the indicator crosses the zero-line from above it is a sell signal and when it crosses it from below it is a buy signal. This trading method works well in trending pairs and it works less well if you have ranges.

Another trading method that is usually used by Woodie's CCI System is the zero-line-reject system. This signal occurs when the CCI touches the zero-line, and then bounces in the opposite direction. It is required that the CCI trends strongly before it is doing it, to show that the trend is strong. This signal is based on a retracement, we enter after price bounces from the zero-line, so we join trend as a tactical point. The mechanics behind this trade is price touching moving average, and bouncing back up: the more trending the moving average, the stronger the signal. The CCI is simply a visual representation of this moving average bounce.

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