CCI indicator is one of the popular oscillator indicators in market analysis. It is especially useful in forecasting market trends and can bring high performance when the market is volatile. Therefore, the following article from Crypto Trading will help you better understand what CCI is and how to apply this indicator in cryptocurrency trading.
Explore CCI indicator in Crypto trading
CCI indicator is a tool to measure price fluctuations in the market, helping to identify overbought and oversold areas. At the same time, it analyzes the strength of the trend and provides information for making trading decisions. From entry points to exit points, and even identifying the appearance of divergence. This article will provide you with basic knowledge about this indicator. Explain the meaning, characteristics, and how to use it most effectively.
What is the concept of the CCI indicator?
CCI stands for Commodity Channel Index in English, which means commodity channel index. It was created by analyst Donald Lambert in 1979 to analyze the commodity market. However, since then, CCI has become very popular and widely applied to many different types of assets in the cryptocurrency trading market.
Many investors use CCI to measure price movements in the market. Especially in the implementation of Momentum trading strategies. Based on the calculation of the average of current and past prices. In addition, CCI also helps to identify overbought and oversold areas and assists in assessing the strength of trends. At the same time, making trading decisions, from entry to exit.
Meaning of CCI indicator in Crypto trading
CCI indicator is a tool used to track the trend of the market. It also helps to identify overbought or oversold times. At the same time, traders can take advantage of CCI to detect weaknesses in the trend. Especially when the price and the indicator do not move in sync (also known as divergence). From there, they can make decisions about opening and closing orders according to the new direction of the market.
In addition to using the CCI indicator to identify overbought and oversold conditions, traders can also use it to assess the strength of a trend. That is, whether the market is in a strong or weak trend.
The most accurate way to calculate the CCI index
To calculate the CCI, we use the relationship between the asset’s price and the moving average (MA). Specifically, the normal deviation from the average price.
The formula for calculating CCI is: CCI = (Average Price – MA) / (0.015 x MD)
Here:
- The average price is calculated by taking the average of three prices (highest, lowest, and closing price) in a particular trading session.
- MA is a moving average. It is calculated by averaging the closing prices over trading periods.
- MD (mean deviation) means average deviation. It is calculated by taking the average value of the absolute deviation of the asset price over a while, namely: MD = [ (MA – AP1) + (MA – AP2) + … + (MA – APn)] / n
- 0.0015 is the smoothing constant.
Note: Crypto trading platforms often integrate CCI calculation formulas to provide quick results. To help investors avoid wasting time and effort on complex calculations.
See more: Learn Momentum – The 3 principles of optimal trading
Instructions on how to trade effectively with CCI indicator
Here are some effective ways to trade with the CCI indicator that traders should refer to:
How to trade when the CCI indicator is rising
When the CCI rises and reaches +100. This indicates that the price is increasing more strongly than the average price. This is a positive signal, indicating that the market is starting a bullish cycle. Investors should consider placing a buy order. However, to improve the accuracy of the prediction, you should follow the following rules:
- Wait patiently until the CCI crosses above +100. This indicates that an uptrend is about to start. At least a bullish run is underway.
- Then wait for a bearish backtest. It is important that the CCI goes down but not below the 0 line. If the CCI crosses the 0 lines, your prediction may be incorrect. The market may be in a bearish phase.
- Buy only when there is a consensus of 3 to 5 candles going against the trend, or when the CCI is close to touching the 0 line.
- Place a stop-loss order below the bottom of the nearest reversal zone.
- Place a take profit order when CCI reaches 200 or when CCI falls below the 0 line.
- In case the price has not reached the stop loss level yet but the CCI drops sharply and crosses the -100 level. You should close the order because there is a high probability that the market has gone against your initial prediction.
How to trade when the CCI indicator is rising
Trade when CCI falls
The opposite is the case when the CCI indicator increases when the CCI decreases and crosses the -100 level. This is a sign that the market is entering a bearish phase.
Investors should consider placing orders when the CCI almost touches the 0 line after a bullish retest.
When you want to make a profit, you can place an order when the CCI index reaches -200. Or at the point where the CCI starts to rise above the 0 line.
For stop loss order, you can set it at a recent high.
How to trade with CCI indicator when divergence – convergence appears
Divergence occurs when the price makes a new high that is higher than the previous high. However, the CCI makes a new high that is lower than the previous high. When divergence is detected, it is a sign that the market may be preparing to change from an uptrend to a downtrend.
Convergence occurs when the price makes a new low that is lower than the previous low. However, the CCI makes a new low that is higher than the previous low. If the market shows signs of convergence, this indicates that an uptrend is underway.
How to trade when the Crypto trading market is oversold – overbought
In case the CCI indicator goes beyond the -100 level. The market is considered to be in an oversold state. When the CCI starts to show signs of increasing again near the -100 line, investors should consider buying. Because there is a possibility that the market will correct and increase in price again.
To do this, traders can place orders when the CCI rises again and touches the -100 line. However, to increase the accuracy of their prediction, they can wait until the price continues to rise and crosses the 0 line. Or after there have been 2 to 3 bullish candles since the CCI touched the -100 line.
Place a stop loss at the previous recent low and take profit when CCI crosses the +200 line, or when CCI starts falling and continues to cross the 0 line. At least double the stop loss.
Conversely, these principles can also be applied to a similar overbought situation.
See more: Open an Bybit account – explore the crypto exchange
What are the limitations of trading with CCI indicators?
The CCI line can provide useful signals that help investors enter or exit trading positions more appropriately. However, the CCI Index still has certain limitations:
- Sometimes, CCI can be delayed, leading to late information delivery and causing investors to miss trading opportunities. Especially in flash loan strategies. Therefore, to forecast the market most accurately, in addition to using CCI. Investors should also combine it with other technical analysis methods.
- While the CCI is useful in detecting overbought and oversold signals, it does not follow a specific formula. Therefore, the signals it provides are highly dependent on the subjectivity and experience of each investor.
Conclude
The CCI indicator has many advantages in analyzing price trends, identifying overbought and oversold areas, as well as detecting signs of divergence and convergence. But to achieve the best results, it still needs to be combined with price action and other technical analysis methods. Hopefully, the information from Crypto Trading will be useful to you. Follow our website to update the best news about Crypto. Good luck!
Frequently Asked Questions
What is the main function of the CCI indicator?
The CCI is often used to identify overbought and oversold points in the market. It can also help identify buy and sell signals.
How does the CCI indicator determine overbought and oversold points?
When the CCI crosses above +100, the market is considered overbought. Conversely, when it crosses above -100, the market is considered oversold.
What types of assets can the CCI indicator be applied to?
Originally designed for the commodities market, the CCI is now widely used across a wide range of asset classes, including stocks, cryptocurrencies, and the forex market.
