Forex CCI

Forex CCI (Commodity Channel Index) has been developed by Donald Lambert. Forex CCI has been originally created as the indicator for definition of reversal points in the commodity markets; however in time it began to be popular in the share market and in Forex.

The assumption on which the indicator is based consists that all actives move under influence of the certain cycles, and maxima and minima appear with the certain interval. Forex CCI concerns to oscillators, measuring speed of price movement. The index shows a divergence of the current price from its average value.

Formula:

Calculation of the ‘Typical Price’:

Calculation of the Simple Moving Average from Typical price:

Calculation of the median divergence:

Where

Formula of the Forex CCI will look as follows:

For the purposes of scaling, Lambert has installed a constant at a level 0.015 that approximates from 70 up to 80 % of Forex CCI values between levels -100 and +100.

Chart:

Description:

Forex CCI fluctuates above and below a zero mark. The percent of Forex CCI values which are between +100 and -100 will depend on quantity of the periods used for its construction. A shorter (with smaller quantity of the periods) Forex CCI will be more volatile, and less of its values will get in a range between +100 and -100.

Accordingly, the more periods will be used for Forex CCI calculation, the more percent of values of the indicator will be between +100 and -100. The author recommended as key parameter of the Forex CCI one-third of full cycle (for example from a minimum, up to a following minimum or from a maximum up to a following maximum). For example, if a market fluctuation’s cycle is 30 days, the recommended value for Forex CCI would be 10 days.

Note: Cycle's length definition should be made irrespective of the Forex CCI and other methods. Forex CCI is a versatile enough indicator, capable to create the big spectrum of buy and sell signals. Traders and investors use Forex CCI for definition of reversal price points, extrema on the chart of the price and force of a trend. As well as the majority of indicators Forex CCI should be used with confirmations from other indicators.

Uses:

Recommendations about work with the Forex CCI concerned movements which are above +100 and below -100 and give buy or sell signals. As from 70 up to 80 % of time Forex CCI values are between levels +100 and-100, buy or sell signals will appear 20 - 30 % of time. When Forex CCI crosses +100 from below upwards, it is considered, that the currency pair moves to the strong ascending trend, and the buy signal appears. The position is closed on a return signal when Forex CCI falls below +100. When Forex CCI crosses -100 from top to down, it is considered, that the currency pair moves to the strong descending trend, and the sale signal moves. The position is closed, when Forex CCI back crosses the level -100.

Subsequently Forex CCI began to be used for definition of reversal points. It can be used for definition of market overbought and oversold. It is considered, that the currency pair is oversold, if Forex CCI falls below -100 and is overbought, if it grows above +100. After Forex CCI has entered into an oversold zone (below -100), the buy signal arises at crossing a level -100 in the opposite direction (from below upwards). When Forex CCI is in an overbought zone (above +100) the sale signal arises, if Forex CCI crosses a level +100 in the opposite direction (from top to down).

Divergence analysis which strengthens a trading signal is used on Forex CCI. ‘Positive divergence’ below -100 (i.e. two consecutive minima on Forex CCI when the second minimum above the first on the indicator, but below the first on the price chart) increase force of a signal when the price crosses a level -100 from below upwards. ‘Negative divergence’ above +100 (i.e. two consecutive maxima on the indicator above +100 when the second maximum below the first on the indicator, but above on the price chart) increase the force of a signal when Forex CCI crosses +100 from top to down.

Break of trend lines formed on the indicator can be regarded as input or output signals from a position. Trend lines can be drawn by connection of consecutive maxima or minima. At an oversold level (below -100) break of such trend line upwards is considered as a signal to growth of the market and on the contrary at overbought (above +100) break of such trend line downwards can be regarded as a sale signal.

Lacks:

The Forex CCI is created for the cyclic markets and well works only when the market is really subject to constant enough cycles. In the Forex market cycles are difficultly distinguished, accordingly optimum period is selected with greater work.

Warning:

It is not recommend to use any indicators on real accounts without preliminary testing their work for the demonstration account or testing as trading strategy. Any, even the best indicator applied incorrectly, gives a set of false signals and as a consequence, can bring substantial losses during trade.

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