There are a number of types of technical indicators that can assist you to complete the pertinent analyses for the Forex market. Among this choice of indicators there is one that enables you to detect the phenomena of over-sale and over-purchase; these are opportunities that should not be missed when trading on the foreign exchange market. Here therefore is some detailed explanation concerning the operation of this indicator and its use when trading in currencies.

What is the Commodity Channel Index?

The Commodity Channel Index is also known as the CCI. It is a technical indicator of the fluctuating indicator family created by an American economist, Donald Lambert, during the 1980s.

Originally, the use of the CCI basically concerned the commodities market but little by little it has expanded to the other markets including the Forex with a real performance relating to technical analysis.

The Commodity Channel Index highly resembles another technical indicator named the Stochastic Indicator as it moves in a highly energetic manner with extremely short fluctuations. It is therefore most suitable for experienced traders.

Operation of the CCI indicator:

To put it simply, the CCI provides interesting indications in the cases of over-purchase or over-sale. Basically, when it is high, we refer to over-purchase, and when it is very low we refer to over-sale.

Concerning the charts, the Commodity Channel Index is displayed by 2 lines, one at 100 and the other at -100. Although the majority of fluctuations take place between these two lines, it is basically the other fluctuations that interest us.

The fluctuations that take place in this zone are actually considered as trading range periods which means that the asset displays no real interest.

These particular periods are actually renowned for being unfruitful in terms of trading as the volatility is too weak and no clear trend can be observed.

The use of the CCI on the Forex:

The Commodity Channel Index can be used in two different ways when trading online. It can be used to study the divergences between the rates, or more frequently, to detect, as we have seen, the levels of over-sale and over-purchase that provide useful trading signals.

Generally speaking, an asset is considered to be over-purchased or over-sold when its rate goes beyond the 100 or -100 lines that are traced on the charts by the Commodity Channel Index. The currency pair is therefore overvalued when its rate goes beyond the CCI100 level whereas if the rate goes below the -100 bar it is considered to be undervalued.

If you wish to enter the market, on the rise or on the fall, based on these indications then it is recommended that you do so once the asset rate level has returned to the neutral zone to provide more security. Your position will thereby remain open as long as the rate of your asset remains in this zone.

Conclusion:

Although the CCI indicator can seem complex at first glance, it can be of great use for detecting the best entry points on the market. It does not however need to be practised systematically but can be used in conjunction with other indicators such as the RSI to confirm signals obtained and avoid false interpretation.

Of course you should never forget to always take the current events into account that could inverse or accelerate the trends.