CCI indicator is commonly known as “Commodity Chanel index”. This unique indicator used by many professional traders for the identification of trend change and weakness in the trend. The value of the CCI indicator data is calculated by measuring the current price level relative to an average price of the past movement. Another classic feature of CCI indicator is identifying the overbought and oversold condition of a currency pair.
Let’s look at an example of CCI indicator on GBPUSD daily chart.
Figure: CCI indicator on GBPUSD, daily chart
In the above figure, the CCI indicator helps us to identify the potential trend reversal and overbought and oversold condition of a pair. If the value of CCI is above 100 then the market is said to be overbought and if the value of CCI is below-100 then the market is said to be oversold. The green line indicates the validity of a trend and gives us the signal when possible reversal is coming. The bullish divergence between CCI and the raw price movement of the market confirm bullish scenario. When there is a bearish divergence between the CCI curve and market price data then we can assume that a bearish scenario is coming soon.
A professional trader looks for potential sell signal when the value of CCI is above 100.They also mark out the potential key resistance point so that the confluence of analysis is perfect for CCI reading. When the value of CCI is less the -100 trader look other parameters to confirm the buy signal. “Basically, CCI is used by the trader as a filter.”
This “Commodity Chanel index” indicator helps the trader to execute a quality trade in the market. Though the reliability of CCI indicator is extremely high but it’s better if we use indicator as a filtering tool.