Commodity Channel Index or publicly called as CCI, is an indicator introduced by Donald Lambert, a commodity trader, in 1980. This indicator was mainly used in the commodity trading, but it’s recently used in other financial markets including currencies market or forex. PAMM traders and PAMM investors usually use this indicator to help them identify the cyclical trends in forex market.
CCI typically oscillates above and below a zero (0) line. There are three common areas in this indicator:
- The overbought area (above 100)
If this area, trader may take a SELL position based on the concern that market price will no longer go higher. Instead, it will reverse and then fall down.
- The oversold area ( below -100)
When the chart is in this area trader will usually open BUY position. This action is based on a consideration that price will no longer go lower. It will possibly go to the opposing way which is go up and rise again.
- The median area (between 100 and -100)
When market is in this median area, it’s better for trader not to take ANY actions. Why? Because it will be difficult to predict whether the price will climb up or fall down.
The CCI works in a similar way with other indicator like Stochastic Oscillator and RSI but it’s not as famous as the two prior indicators. When used in conjunction with other oscillator indicators, this combination will be a valuable tool in identifying potential tops or bottoms in price movement.
Even though the all three indicators are able to determine the overbought and oversold conditions, sometimes they just don’t walk in line. If you use the two or three indicators in a combination, sometimes they give you different information. For example, when the RSI is currently giving you a normal signal or an oversold area, the CCI is eventually giving a signal of the overbought area. If this happens, you better take no action but wait and see until the two indicators are giving the similar signals.
Actually, the price movement is very unstable. After a little price-climbing from the oversold area to the median area, it can fall back down to the oversold area in just a minute. It means the information from CCI is not always perfect. Indeed, most of the indicators are not perfect. That’s why we are recommended to use two or more indicators while doing our daily trade.
Happy trading in PAMM Investments !
Don’t forget to read this important article for PAMM trader
1. How to become a PAMM Trader
2. Understanding your Forex Trader Level as PAMM Trader