The CCI indicator is an oscillator used to identify periods when the market is overbought or oversold. The CCI is a linear oscillator but has its own unique features and advantages. So what makes the CCI so special and trusted by many traders? Find out more information below from Crypto Trading to know What is CCI indicator and how to trade with CCI effectively.
To know What is CCI indicator, refer to some of the following information.
To easily understand What is CCI indicator, read the article below.
What is the CCI indicator?
CCI stands for Commodity Channel Index. It means that the Commodity Channel Index was invented by technical analyst Donald Lambert in 1979. The purpose of launching this indicator is to analyze the market more effectively than commodities. However, up to now, CCI is widely used on many different types of assets. In order to make it easier to make money with Crypto more effectively.
In addition, many investors use CCI to measure price movements in the market. Thanks to the use of averages of current and past prices. In addition, investors using CCI can evaluate trend strength and learn entry and exit points.
Characteristics of CCI indicator
The CCI is a moving average that fluctuates around the ) line, which runs from -100 to 100. These types of parameters can help investors identify market trends. Here are some of the CCI’s outstanding features:
- Indicator from 0 – 100: Market confirmed in uptrend.
- Indicator at >100: The market is in the overbought zone, signaling a possible price reversal.
- Indicator 0 to -100: The market confirms it is in a downtrend
- Indicator at < -100: The market is in oversold territory and the price may reverse in the near future.
- When the indicator fluctuates around 0, the market is in an accumulation trend.
In general, the CCI has no estimated value limit feature with 75% of CCI movements falling within the range of -100 to 100. The rest of the movements will fall outside this range.
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CCI indicator calculation formula applied to make money in Crypto
The formula for calculating CCI is as follows: CCI = (AP – MA) / (MD * 0.015)
In there:
- AP: Absolute average of closing prices over the past n periods
- MA: Moving average of closing prices over the past n periods
- MD: Average standard deviation of closing prices over the past n periods
- n: Calculation period (number of days used to calculate the average values)
For example:
Suppose we want to calculate CCI with n = 14.
- AP: Closing prices for the last 14 days are [10, 12, 14, 13, 15, 14, 12, 13, 14, 15, 16, 15, 14, 13]
- MA: MA(14) = (10 + 12 + 14 + 13 + 15 + 14 + 12 + 13 + 14 + 16 + 15 + 13 + 14 + 15) / 14 = 13.64
- MD: MD(14) = Calculates the standard deviation of 14 closing prices
- CCI: CCI(14) = (AP – MA) / (MD * 0.015)
How to determine oversold and overbought points using the CCI indicator
What is CCI indicator that many people use to determine oversold and overbought points? Below is how to determine oversold and overbought points using the CCI indicator:
Determine the overbought threshold:
- A CCI level above +100 is generally considered overbought territory.
- A CCI level below -100 is generally considered oversold territory.
However, this threshold may vary depending on the market and trading time frame.
- For volatile markets: Higher thresholds should be used, for example, +120 for overbought and -120 for oversold.
- For less volatile markets: Use lower thresholds, e.g. +80 for overbought and -80 for oversold.
Divergence analysis:
- Bullish Divergence: When the price makes a new high but the CCI fails to make a new high. This could be a sign that the uptrend is about to end and the price may reverse to the downside.
- Bearish Divergence: When the price makes a new low but the CCI fails to make a new low. Therefore, this is a sign that the downtrend is about to end and the price may reverse to the upside.
Combined with other indicators:
- Using the CCI index in combination with other technical indicators such as: RSI, Stochastic Oscillator, MACD. This can help provide more effective trend confirmation signals and entry and exit points.
How to trade with the CCI indicator?
To easily make CCI transactions, you can refer to some of the following ways.
Trading the CCI index in the trend correction zone
Investors need to determine the market price trend to place BUY and SELL orders. Specifically as follows:
- For Buy orders: In the downward corrections of an uptrend, investors need to find a point to place a Buy order. If the CCI signal crosses the +100 line. Or the entry point is at a green candle that coincides with the selling price zone of the CCI index, the stop loss point is below the correction bottom.
- For Sell orders: In the upward corrections of the downtrend, investors look for Sell entry points. When the CCI indicator signal crosses the -100 line. The entry point will be based on the bearish candlestick pattern in the signal zone. The cut-off point is right above the correction peak that the price has just created.
How to trade a sideways market with the CCI indicator?
Here are some popular ways to trade using CCI in a sideways market:
How to trade in overbought/oversold zones:
- Buy when CCI crosses -100 (oversold zone): This is a sign that the price has fallen too far and is likely to recover.
- Sell when CCI crosses +100 (overbought zone): This is a sign that the price has increased too much and is likely to correct down.
Note: Should be combined with other indicators such as RSI, and stochastic indicator to confirm effective reversal signals.
Strategy for trading according to divergence signals:
- But when the price makes a new high but CCI fails to make a new high (bullish divergence): This, is a sign that the downtrend is about to end and the price may reverse to the upside.
- Sell when the price makes a new low but CCI fails to make a new low (bearish divergence): This could be a sign that the uptrend is about to end and the price may reverse to the downside.
Strategy to trade according to price trends:
- When the market is sideways, prices usually fluctuate within a certain price channel.
- You can use CCI to identify the upper and lower borders of the price channel.
- But when the price touches the lower boundary CCI crosses -100.
- Sell when the price touches the upper border and CCI crosses above +100.
Note: This strategy requires you to accurately identify the price channel before applying it.
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Trade CCI when divergence signal appears to make money Crypto
Investors can make CCI transactions when divergence signals appear as follows:
Distinguishing between types of divergence:
- Bullish Divergence: When the price makes a new high but the CCI fails to make a new high. This indicates that the uptrend is about to end and the price is likely to reverse downwards.
- Bearish Divergence: When the price makes a new low but the CCI fails to make a new low. This is a sign that the downtrend is about to end and the price is likely to reverse to the upside.
Confirmation of divergence signal:
- Combine with other indicators: Use additional indicators such as RSI, Stochastic Oscillator, MACD, and Bollinger Bands to confirm trends and increase the reliability of divergence signals.
- Volume Analysis: High volume coupled with divergence signals encourages a possible reversal.
Select entry and exit points:
- Buy: When bullish divergence is confirmed, buy when the price breaks through support or breaks above resistance.
- Sell: When bearish divergence is confirmed, sell when the price breaks through resistance or breaks above support.
Risk management:
- Set stop loss: Always set a reasonable stop loss to limit losses if the divergence signal is false.
- Use Take Profit Orders: Consider placing a take profit order to lock in profits when the price moves in a favorable direction.
Conclude
The above article, Crypto Trading has given you some information about What is CCI indicator and how to trade effectively. Traders should refer to the information and practice this indicator carefully to understand it more deeply. From there, it is easy to identify the reliability of each signal and help the trading process more effectively. Wish you successful trading and don’t forget to follow us to update more information.
Some related questions
Which indicator should the CCI indicator be combined with to increase analysis efficiency?
CCI should be used in combination with RSI, Stochastic Oscillator, MACD, Bollinger Bands, Moving Averages…
Should you trust the CCI indicator?
The CCI indicator is a useful support tool in trading but should not be relied on completely. It should be used flexibly, combined with other analytical indicators, and managed effectively.
Can CCI generate false signals?
Yes. CCI can generate false signals, especially in volatile markets or when unexpected events occur.
