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What is the CCI indicator?
The CCI indicator (Commodity Channel Index) is a popular oscillating indicator that can be used in all markets (not just commodities). It's used to measure the asset's current price against an average price over a period of time. It's a flexible type of indicator that can be used to determine whether the asset is overbought or oversold. For traders who prefer long trades, this helps them determine when a trend is likely to reverse. It can also be used to predict divergence.
Who developed CCI?
CCI is now over 40 years old! It can therefore be said to be a mature technical analysis tool that, because of its usefulness, is still used today. The creator of the CCI oscillator is Donald Lambert. Initially, he used the indicator in connection with the analysis of stock market cycles. He used the CCI to get the right timing for his operations. He claimed that the CCI performed well on cyclical and seasonal commodity contracts. Today, CCI is widely used in all time frames, including day trading.
Setting up CCI indicator on the IQ Option platform
After logging in to your IQ Option account, go to the indicators feature.
Click on “popular” and then select the Commodity Channel Index. The indicator will appear at the bottom of your chart. It appears as a blue line that oscillates between -100 and +100.
The CCI was created such that the blue line moves between two extremes. However, it can move beyond these extremes. So if the blue line crosses the +100, the markets are overbought. You should expect the prices to start falling in the future. Similarly, if the line crosses the -100, the markets are oversold and prices will start rising in the future.
How to trade using CCI on IQ Option
What does CCI indicator tell you?
The first way to trade using CCI is by using the overbought and oversold signals. If the line crosses the +100, the markets are overbought. It's a signal to prepare to enter a sell position when the line crosses the same line in a downtrend. When the blue line crosses the -100, prepare to enter into buy position when the line crosses the line in an uptrend.
The mentioned solution is a classic oscillator play on exits from overbought and oversold zones. If you take another look at the chart above, you may be able to guess what else could be a signal to open a position on the CCI Indicator. Do you have it?
Changes in the direction of the CCI line in overbought or oversold zones are also quite good signals. If the CCI Indicator hits an overbought zone above 100 we wait for it to change direction from upward to downward. Immediately after this change you can open a position for a price decline. If, on the other hand, the CCI enters the oversold zone and there changes direction from downtrend to uptrend, you can immediately open a position for a price increase. This is a very simple yet quite effective approach to the CCI indicator.
How do traders use the CCI?
The second way to use CCI is to determine divergence. In this case, the prices on the chart are clearly falling. But the CCI is moving in the opposite direction. This divergence is a signal of an impending trend moving in the opposite direction.
Using the chart above, the prices are falling. The CCI enters the zone below -100 and forms a local low there. We also have a bottom on the price chart. The CCI then turns upwards above -100 to make another low and crosses the -100 line downwards once again. This last bottom is higher than the previous one. The price chart in the meantime has made a downward move beating the previous price minimums. So we have a bullish divergence. As soon as the indicator breaks through the -100 line upwards we get an excellent CCI indicator buy signal based on the identified divergence.
The CCI indicator is a versatile technical analysis tool. But to get a feel of its power, you must practice trading with it. Start by opening an IQ Option practice account here and start trading with this cool oscillator.
Good luck!