CCI Average Indicator - Advanced Forex Strategies

CCI Average Indicator

The CCI Average Indicator is an oscillator that was developed by Donald Lambert. The CCI Average Indicator was primarily designed to capture the cyclical turns in the commodity markets but the versatility of the indicator soon found its way into other markets including equities and forex as well. At the very basic level, the Commodity Channel index indicator measures the current price relative to the average price over a given period of time. In other words, the CCI is used to measure how quickly prices deviate from their average price and thus signals a reversion to the average price.

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The CCI Average indicator, being an oscillator cycles between the +100 and -100 level with a 0-line forming the basis. When the CCI is above the +100 level it signals a strong bullish moment and points to an overbought level in the markets. Likewise, when the CCI indicator moves below -100 it signals an extreme bearish momentum and points to oversold conditions in the market.

The CCI Average Indicator is based on the default settings of 20 periods SMA.

The chart below illustrates the CCI indicator applied to the charts.

CCI Average IndicatorCCI Average Indicator

Trading Strategy Using the CCI Average Indicator

A simple trading strategy can be developed using the CCI Average indicator. Because we know that the CCI is based off the 20 periods SMA and the fact that the +100 and -100 signal the overbought and oversold conditions in the market, which precede a reversion to the average price, a trading strategy involving a 20 SMA and the CCI with 20 periods can be used. When applied to the charts, the indicators can be used to trade with the 20 SMA acting as a target price level. Besides the 20 SMA, traders can also use Bollinger Bands, which incidentally also uses the 20 SMA with the upper and lower bands set apart by 2 standard deviations.

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The Bollinger Bands makes for a better indicator than merely a 20 SMA due to the fact that when prices trade near the outer Bollinger Bands, it signals that the markets are in an extreme trending mode and thus, sooner than later, prices tend to revert to the average price or the 20 SMA. The chart below shows the 20 periods Bollinger Band applied alongside the CCI indicator.

Bollinger Bands and CCI Average Indicator
Bollinger Bands and CCI Average Indicator Strategy

As seen on the chart, buy and sell signals are generated when price is at the extreme and the CCI is above or below the +100 or -100 level. Trades can be entered using the 20 period SMA or the mid Bollinger Band as a price level to take profits. Traders should however note that this is a scalping strategy and in some cases when the trends are strong, prices tend to walk the outer Bollinger Bands with little to no reversion to the middle Bollinger Band.

Besides the above simple trading strategy, traders could also use the CCI indicator in order to spot divergences, which can also be used to trade targeting the middle Bollinger Band. The CCI’s parameters can be tweaked in order to capture the momentum on the markets. Some traders also prefer to use the +200 and -200 overbought and oversold levels in order to capture the extreme prices momentums. Although signals are less with this kind of setting, it does allow for signals to be more reliable.

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