Developed by Donald Lambert, CCI measures the position of price in relation to its moving average and is designed to identify cyclical turns. CCI works well in ranging markets and typically fluctuates between +100 and -100 readings.
CCI is considered to be overbought at +100 readings or above and oversold at -100 readings or below.
Formula
CCI = (Average Price - MA) / (0.015* Mean Deviation)
Overbought / Oversold levels
Oscillator readings at or below -100 are considered oversold.
Oscillator readings at or above +100 are considered overbought.
Popular trading signals from CCI
I. In trending markets
Take only signals from CCI in the main direction of the trend. If the main trend is up, take only oversold signals from CCI. Conversely, if the main trend is down, take only overbought signals from CCI.
Some currency traders identify the currency pair's long-term trend and then use extreme readings for entry points. If the mid long-term trend is bearish for a currency pair, then overbought readings could mark potential entry points to go SHORT (again).
II. In ranging markets
Go long if the CCI turns up from below -100 back above.
Go short if the CCI turns down from above +100 back below.
Please remember that CCI, as with all other technical indicators should not be used by itself but should be combined with other indicators / studies to make a complete forex trading system.
