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Talking Points

  • Oscillators such as CCI can be used to trade dips in an uptrend on Forex pairs.
  • Overbought and Oversold levels offer clear market entry signals.
  • Traders will time their position with momentum returning to the underlying trend.
When traders think technical indicators, normally oscillators come to mind. Oscillators are a class of indicators designed to track price by moving (oscillating) either above or below a centerline. Knowing how to read and understand oscillators can specifically help pinpoint market entries for trend bound markets. Today we will review using the Commodity Channel Index (CCI), and discuss how we can use it to trigger trades during strong Forex trends.

Learn Forex –CCI Overbought / Oversold

Trade_the_Trend_with_CCI_Retracements_body_Picture_1.png, Trade the Trend with CCI Retracements(Created using FXCM’s Marketscope 2.0 charts)

If you are already familiar with RSI (Relative Strength Index), MACD, ROC (Rate of Change), or other oscillators, you are one step closer to understanding how to trade with CCI. All of the above indicators will utilize a unique mathematical equation to depict overbought and oversold levels for traders.

Pictured above we can see CCI plotted on the graph, moving between a +100 value to indicator overbought levels, while below -100 value represents an oversold value. The indicator will swing between these points as the market changes direction with CCI residing between these points nearly 70-80% of the time. As with other overbought/oversold indicators, this means that there is a large probability that the price will correct to more representative levels. Knowing this, trend traders will wait for the indicator to move outside of one of these points before reverting back in the direction of the primary trend. Let’s look at an example using the current trend on the AUDCAD.

Learn Forex –AUDCAD Trend with CCI

Trade_the_Trend_with_CCI_Retracements_body_Picture_3.png, Trade the Trend with CCI Retracements(Created using FXCM’s Marketscope 2.0 charts)

Above we can see an example using a hourly graph of the AUDCAD currency pair. The pair is in an established uptrend with price remaining above a 200 period moving average. Knowing this, trend traders should look to initiate new long positions buying the AUD (Australian Dollar) against the CAD (Canadian Dollar). The primary way of timing entries with CCI in an uptrend is to wait for the indicator to move below the oversold value marked at -100. With price now at a relative low, traders will enter into the market when CCI moves back above -100. This creates an opportunity to buy the currency pairs momentum is returning back in the direction of the trend.

With CCI now reading over +100, traders will need to wait patiently for the next entry signal. While we wait, it is a great time to continue your trading education. (If you would like to learn more about CCI – Register for our FREE Course here.)

To contact Walker, emailwengland@fxcm.com. Follow me on Twitter at @WEnglandFX.

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Want to learn more about trading CCI? Sign up for our free CCI training course and learn new ways to trade with this versatile oscillator. Register HERE to start learning your next CCI strategy!

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