In this article, we want to show you the power of the Commodity Channel Index (CCI). The CCI is an oscillator, and therefore a range indicator. We know that many beginners misuse this excellent oscillator, and we use it to solve the secrets.
Correct use of extreme areas in the CCI
You may already know that, in most cases, oscillators are represented in a fixed band. This usually happens between 0 and 100, with an overbought and an oversold area in this range, for example, the very well known Relative Strength Index (RSI). The CCI, on the other hand, has an average of 0 and highlighted values at +100 and -100. The CCI can also assume values of +300 or -350. These very large distances from the center are very rare.
At this point, you shouldn’t make the mistake of thinking that these extreme values are used for trading.
Return to normal as a signal
If we call the range between -100 and +100 the normal range, then this range is of great interest. A trade signal is generated when the indicator returns from the extreme range to the normal range. So there is a short entry if the indicator crosses the +100 mark from top to bottom. A long entry occurs when the mark is crossed from -100 from bottom to top.
Use support and resistance
As you can see in the chart below, the CCI gives quite a lot of signals, and most of them look very reliable. However, we would like to encourage you to pay attention to one more detail in order to achieve even better results. As already mentioned, the CCI is a range indicator. It works particularly well when it encounters support and resistance.
If you use additional support and resistance, you really filter out excellent spots.
Use divergence in the CCI
If the previous trading setup is still too unsafe for you, we have another valuable tip. If you pay attention to the divergence as confirmation, you have the ideal spot for a trade with a very high probability of success.
What is divergence?
Divergence is understood to mean a different development in price compared to the indicator, whereby it indicates the future direction.
The following chart shows a normal development (shown in blue) and a divergence (shown in red):
Red lines: Rising highs form in the chart, but not in the CCI. The indicator forms a lower high. Here one speaks of a bearish divergence. This is an indication of falling prices.
Now let’s look at the picture from above under the new insight to find out if further trading signals are missing:
One spot falls out, but let’s summarize briefly. The chart shows a total of 40 immersions in the normal range. 4 out of these 40 were confirmed by support and resistance. 3 out of the 4 very good spots also had a divergence. 2 of these 3 trades could already have been closed with a decent profit, and the third entry is still ongoing.