How to Interpret CCI divergence indicator and Use it Effectively

CCI divergence indicator

If the price on the chart makes consecutive highs, and the indicator shows consecutive lows, this is called CCI Divergence.

Likewise, if the price on the chart makes consecutive lows, and on the CCI indicator, we see consecutive highs, this is also a CCI Divergence.

What is the CCI indicator?

The Commodity Channel Index (CCI) is a technical indicator. Donald Lambert developed the indicator in the 1980s. CCI or Commodity Channel Index is part of the standard MetaTrader 4 indicators. To use this indicator correctly, you need to understand its scope and features correctly.

Lambert created the indicator for working in commodity markets to identify cyclical reversals. The basis for the creation of CCI was the theory of cycles. CCI compares current prices with the average over a specified time interval. The author himself recommended using a period equal to 1/3 of the full period. This means that an asset forms local highs every 90 days (full cycle), then it is better to take a period of 30 days.

Calculation of CCI indicator

CCI = (Typical Price – SMA) / (0.015 * Mean Deviation)

Let’s analyze it in more detail.

1. Find your typical price. To do this, add the high, low, and close price of each bar and divide the price by 3.

TP = (HIGH + LOW + CLOSE) / 3

2. Calculate the n-period simple moving average of typical prices.

SMA (TP, N) = SUM (TP, N) / N

3. Subtract the resulting SMA (TP, N) from the TP prices of each of the preceding n periods.

D = TP – SMA (TP, N)

4. Calculate the n-period simple moving average of the absolute values ​​of D

SMA (D, N) = SUM (D, N) / N

5. Multiply the calculated SMA (D, N) by 0.015

M = SMA (D, N) * 0.015

6. Divide M by D

CCI = M / D

Where:

HIGH – the maximum price of the bar;

LOW – minimum bar price;

CLOSE – closing price;

SMA – Simple Moving Average;

SUM – amount;

N – the number of periods used for the calculation

Of course, to plot CCI on a chart in the MT4 terminal, it is unnecessary to know all this. But for a better understanding of what exactly this indicator shows, it is necessary to understand how it is calculated.

How do you interpret CCI indicators?

The CCI was designed to identify overbought and oversold levels. The CCI indicator does this by measuring the relationship between price and a moving average, or more precisely, the normal deviations from that moving average.

High values ​​of the index indicate that the price is unusually high compared to the average, while low values ​​indicate that it is too low. This indicator looks like a line fluctuating in the range from about +300 to -300. Unlike many others, this indicator has no limitations, so readings can sometimes go beyond these conditional boundaries of 300 points.

The CCI is located in the MetaTrader4 terminal in a separate window below the price chart. The settings are simple – the period and the price to be used in calculations. The purpose of the indicator is to determine the moment of a trend reversal. The oscillator line moves from 0 to +100 in a bullish trend and from 0 to -100 in a bearish trend. The green boxes in the figure below show a bullish trend (0 to+100), while re boxes show a bearish trend (0 to -100). 

Analysis to identify long-term trends is best done on weekly and monthly charts. This allows us to assume that the breakout of the levels +100; -100 will indicate a long-term trend. 

The nature of the movement of the indicator from the level of 0 to +100 and from 0 to -100 prompts the future price movement. If the indicator line during this period is sharp, rapid, then a strong rise/fall can be expected. If the indicator line is flat and hardly overcomes the level, this indicates the movement’s outcome.

If the indicator stays between the levels +100 and -100 for a long time, then the market is flat. 

For more risky trading, the following signals of the CCI indicator can be used as an entry: 

• To buy, the breakout of the -100 level from the bottom up; to sell the breakout of the level +100 from top to bottom.

Overbought/Oversold

These levels are taken as levels +250 and -250 or +300 and -300. It all depends on the volatility of the asset. To do this, you need to select the settings for each currency pair individually.

When determining volatility, CCI rarely grows on its own and shows false signals that can be avoided by combining it with indicators, for example, with ADX.

Overbought-oversold signals

• When the mark of the indicator goes beyond -100 and +100, it is overbought or oversold.
• When the price chart is in an overbought position, crossing the 100 line from top to bottom, it means that its decline is expected soon.
• When the price chart is in an oversold position, crossing the -100 line upwards, this means that it is expected to rise soon.

Bullish/Bearish Divergences

Divergence is considered one of the strongest signals of any oscillator. Explicit divergences and convergences are formed much less frequently than just entries into overbought and oversold zones; therefore, they are more reliable as a signal.

Divergence sell signal

Convergence and divergence trades are opened as follows:

If, in an uptrend, the last local high was higher than the previous one (the line connecting them is directed up), and the last local low of the indicator is lower than the previous one (the line is directed downward), a sell position can be opened.

If the last low is lower than the previous one in a downtrend, and the last bottom on the indicator is higher than the previous one, a buy trade can be opened.

You can also exit trades by Commodity Channel Index signals – when the indicator line crosses the opposite level. Each trade must be protected by a stop loss (set at a local low/high or a key level).

CCI Divergence Trading Strategies

What is the fundamental factor in deciding when a currency starts moving for most professional Forex traders? The answer is unequivocal – indicator divergence.

This is one of the best strategies that has proven itself at various intervals. But it is best used at M15 and above. The CCI indicator formula is an indicator (indicator) of the signal that follows the trend in case of too large divergence of the last price compared to the moving average.

The divergence of the price shown by the CCI indicator and the one shown on the chart is Divergence. It shows the sequence of price lows with the consecutive highs displayed on the chart. And vice versa.

What needs to be done when entering the market according to the rules established by the CCI forex strategy? If the price divergence is high enough, the trend is considered established, and the CCI indicator follows the trend. The most commonly used strategy is when the CCI indicator crosses the zero mark or the level with marks (+100) (-100).

At the same time, it is worth noting if the features of the CCI indicator:

1. If it rises very quickly in the range from 0 to 100, it means a great strength of the trend.

2. Conversely, a rapid fall of the indicator after level 100 reached indicates a fall in the trend. And at this point, it is better to stop to protect income.

You can use CCI indicators on monthly, weekly, and daily charts:

• The monthly indicator allows you to set a certain period during which the periods of entering and exiting the market are set. This allows you to choose the most effective strategy.
• The weekly indicator works similarly to the monthly one. That is, you need to exit when the CCI indicator shows a peak, and the alternative one indicates a decline in the trend.
• The daily indicator has one very significant drawback – it is slow. For this reason, it misses the beginning of strong trends, which is a negative factor in trading in volatile and fast markets. For successful trading on Forex markets using the CCI indicator, it must be combined with other indicators, such as ADX.

Which indicators you can combine with CCI

You can use trend indicators with the CCI that may be used as a tool for confirmation. Since CCI is an oscillator, other oscillators like RSI or MACD are not recommended to combine with it. You can use a 20-period simple moving average with CCI. If the CCI indicates a bullish reversal, look for the price and 20 SMA. If the price is above 20 SMA, then the trade can be considered a high probability entry.

Conclusion

CCI is an oscillator that warns in advance of a likely trend reversal when analyzing price dynamics. Thanks to this, it makes trading much more productive.

CCI is one of the most effective binary options tools. It is widely used in trading, as it allows you to increase your odds of success.

The principle of operation of CCI is based on the cyclical nature of the market, and by correctly defining the cycles, you can see when the trend begins and ends, which allows you to win more positions.

This indicator can be freely used both for detecting long-term trends and for looking at reversals. However, not all assets will fit the standard settings.

If you want to receive an invitation to our live webinars, trading ideas, trading strategy, and high-quality forex articles, sign up for our Newsletter.

Subscribe to our YouTube channel.

Click here to check how to get qualified.

Click here to check our funding programs.

Share: