The CCI (Commodity Channel Index) indicator, as the name suggests, was initially created for use in commodity futures markets, but it has also been very effective in other markets, such as forex. Learn with us the main advantages, disadvantages and how to use this indicator on IQ Option.
The CCI, or Commodity Channel Index, was developed by American technical analyst Donald Lambert in order to analyze the commodities market, as the name suggests. However, this indicator has proved effective for a number of other markets, including binary options at IQ Option.
By observing periods of great oscillations and crises, Lambert sought to calculate the ranges that showed stability and use the deviations as a signal to make his trades on the market, because in the long term it will tend to return to the midpoint.
What is CCI?
CCI stands for Commodity Channel Index. Despite the word “commodity” in its name, the CCI also works for currency and CFD traders.
This indicator has become popular because it has proven to be effective in many cases and not only for commodities, but also for many other assets.
The CCI is a powerful but controversial indicator. This article explains when it can be useful and when it’s best to avoid it. You’ll also learn how to use it on the IQ Option platform and read its signals.
How the ICC works
The CCI measures the deviation of an asset’s price from the average value within a selected period. Thanks to this, traders can tell what changes are coming.
The formula for the CCI looks quite complicated. Fear not: the IQ Option platform will calculate it automatically.
If you don’t want to deal with all the math involved, go to the IQ Option Blog. There, there are extensive posts about the CCI. In a nutshell, it analyzes the change in price deviation from the average absolute value.
Prices are above average: the indicator rises.
Prices are below average: the indicator goes down.
Why use the CCI indicator on IQ Option?
It is a great tool for measuring the current price level in relation to an average level, within a given period of time. The further away these levels are, the greater the possibility of making valuable entries.
Like other trend indicators, the CCI indicator on IQ Option also serves to identify overbought and oversold levels. However, it is important to adapt it to each asset.
Experts recommend using the CCI for markets that have intrinsic value: commodities and shares. Why? Because they really CAN be overbought or oversold. The Forex market doesn’t move like that. There is a higher chance of false signals compared to CFDs and commodities.
How to use the CCI indicator on IQ Option?
Donald Lambert was also a mathematician and arrived at the CCI through some formulas. Since you can use this indicator practically on IQ Option, we’ll skip the math part because there’s no need for you to do it. Besides, our aim is for you to learn quickly and practically.
But so that you don’t lose your bearings, we’ll highlight the elements taken into account to calculate the CCI: moving average, standard deviation and typical price. The latter is the average of the high, low and close.
To apply the CCI indicator on IQ Option, the information you need to take into account and apply is the number of periods. Also set the overbought value to 100.
Reading this indicator is quite easy, where positive numbers indicate prices above the average and negative numbers show prices below the average. Both show a trend. The higher or lower the number, the greater the chances of good opportunities, for example when it goes above +100 or -100.
To set it up on IQ Option, go to the Trading Room and choose an asset. Click on the Indicators icon and select the Commodity Channel Index.
Now choose the period. The default period is 14. Most traders use the default settings, but you can change them. The shorter the period, the more volatility can be observed. Press Apply when you’re done.
The indicator will appear at the bottom of the chart.
Strategies with the ICC
The CCI can indicate trend direction and divergence. Let’s look at examples of how this works.
Trends
The most common way to read the CCI is to detect when the line crosses +100 and -100. When the oscillator goes beyond these points, you know that some changes are going to happen in the market.
What kind of changes?
- Crossing +100 from bottom to top: the uptrend is coming. This is the signal to buy.
- Crossing -100 from top to bottom: the downtrend is approaching. This is the signal to sell.
You can see that after the CCI has crossed -100 and +100, the chart begins a gradual downward/upward movement. So when you see +100/-100, you can try trading.
- Crossing the zero point. This is considered a late entry. Missed a signal at +100 and -100? The zero point is your last chance to act.
⇘ The line crosses the zero point from top to bottom: a signal to sell.
⇗ The line crosses the zero point from bottom to top: a signal to buy.
Divergence
If the momentum doesn’t confirm the price, you can expect the trend to reverse soon.
- Bullish divergence. The CCI makes a lower low and the underlying asset makes a higher low.
- Bearish divergence. The CCI shows a lower high and the underlying asset shows a higher high.
Cautions when using the CCI indicator on IQ Option?
Although this is a very good indicator for showing trends, we don’t recommend that you use it alone. The information it provides is often not enough to make a more assertive entry decision, as it can give false signals.
A good reading of the market and the chart can also prevent you from being taken in by false signals.
It’s also important to note that as this is a trend indicator, our recommendation is to use it over longer trading periods, as this will increase your chances of having a winning trade.
The advantages and disadvantages of the CCI indicator on IQ Option
As we mentioned earlier, you need to be careful when using the CCI indicator on IQ Option. This is not just a recommendation for this indicator, as there is no such thing as a perfect indicator.
Main advantages
Easy to understand and use
This indicator is one of the easiest to understand and use on IQ Option. As we’ve already mentioned, to apply it on the platform you just have to select the number of periods and the overbought level and it’s already set up.
It’s also quite easy to read, as it’s a graph with the two demarcations (-100 and +100) and their intermediate levels. Exceeding the two limits indicates oversold or overbought, which can bring you the opportunities you need in the market.
Versatility for different markets
Although the name explicitly suggests it, the CCI (Commodity Channel Index) indicator also works very well with markets other than commodities. The application has proven excellent for markets such as the currency pairs you find at IQ Option.
Excellent accuracy for trends
Although we don’t recommend relying on it exclusively, the IQ Option CCI indicator is excellent for pointing out trends using overbought and oversold levels.
Disadvantages
It focuses exclusively on technical analysis
As a technical (or graphical) analysis indicator, it only considers price history over a given period, period. News that could affect the asset in question or the financial market is not taken into account, which could hinder you if you rely solely on this indicator during a period influenced by news that is very relevant to the market in question.
There is no convention for appointments
As each asset has its own characteristics and history, the overbought and oversold levels that actually generate a trend can vary. That’s why it’s important to analyze the history of the asset and how IQ Option‘s CCI indicator has behaved over the period analyzed.
This can be a bit of work, but it’s important for increasing the degree of assertiveness in your trades.
You should combine it with other indicators
Although this indicator is easy to use, we again recommend that you combine its use with others. This can be a little frustrating if you are a beginner, as we mentioned above how easy it is to understand and use the CCI indicator on IQ Option.
However, we want you to have a better level of accuracy and for that to happen, you need to learn how to use other indicators to combine with the use of the CCI.
Other indicators to combine with the CCI on IQ Option
Well, we couldn’t end this article by saying that you should use the CCI together with other indicators and not mention them. Professional traders often combine it with: moving averages, MACD and Parabolic SAR.
It is also compatible with many other IQ Option indicators.
Final considerations
The CCI is a versatile and powerful tool. It can show when the market is overbought and oversold and can help identify trend and divergence. It works well with the CFD and commodities markets. Forex and cryptocurrency traders can also use it, but with caution. Recommendation: use additional indicators to filter out false signals.
After reading this article, you can learn about market trends with a demo account on the IQ Option platform, and get to know the most interesting trading strategies.
