The Commodity Channel Index (CCI) is a versatile and powerful trading indicator used in the binary options market. It helps traders identify potential market reversals and price movements, making it a valuable tool for both professional and novice traders. This guide delves into the intricacies of the CCI indicator, explaining its workings, strategies, and why it’s a crucial component for successful trading.
Good to know:
- The Commodity Channel Index (CCI) is a trading indicator for identifying market reversals by comparing current and historical price movements.
- CCI values fluctuate between +100 and -100, signaling potential uptrends or downtrends.
- It’s favored for short-term trading due to its focus on market psychology and momentum.
- Strategies using CCI include trading on extreme readings, combining with candlestick patterns, and divergence analysis for entry and exit points.
What you will read in this Post
What is the CCI indicator?
The Commodity Channel Index (CCI) is a widely-used trading indicator in binary options, suitable for both professional and novice traders. It’s designed to predict asset price movements effectively, aiding in successful trading in fast-paced environments.
The CCI, developed by Donald Lambert in the 1980s, oscillates between +100 and -100, helping traders identify when an asset’s value has deviated significantly from its average and is likely to revert. Readings above +100 signal a bullish trend, while those below -100 indicate a bearish trend.
This versatility makes the CCI a valuable tool for analyzing various markets, including currencies and equities, particularly favored by short-term traders.
See the example of the CCI indicator:
Example of the Commodity Channel Index
Let’s observe the price of an apple over the last century. At some point, the apple price might have been half, quarter, or one-eighth of what it’s today. The thing is the value of the apple has increased gradually over time.
Now imagine that shoppers doubled the price of apple overnight. What would happen? Well, the possible scenario is buyers would stop buying that fruit altogether. It will bring the price of apple back to its original value or a little higher.
The point is that any commodity’s price change should be gradual; otherwise, customers would not adapt to the change. The CCI indicator helps traders use this idea in market analysis.
- If the price of a commodity falls too far, traders will not sell the asset considering the price is too low. It will further bring the value of that asset closer to its statistical mean.
- Similarly, if the price of a commodity has moved too far, the market buyers will not come into action, thinking that the price is too high. It will again bring the price closer to its statistical mean.
In simple terms, if the price of a commodity moves too far in either direction, the trader’s psychology will bring the value back to its statistical mean.
How does the CCI indicator work?
To identify the market in which price moves, the CCI indicator works on three basic factors.
- The first factor is the typical price. It is the average of last period’s closing, high, and low prices.
- The second is the strong moving average that is the statistical mean price.
- The last one is the mean absolute deviation. It calculates how far the price of the asset has deviated from its mean price.
With the help of these three factors, CCI shows the distance between simple moving average and current typical price to the mean absolute deviation. At last, the final sum is multiplied by 0.015 for creating a useful result.
The formula for Commodity Channel Index indicator looks like this:
- (Current typical price – simple moving average) / mean absolute deviation/0.015
- Here, the Typical Price (TP) = (High + Low + Close)/3
Most of the time, after using this formula, the reading is between -100 and +100. But sometimes, the value goes outside these boundaries. When this happens, it shows oversold and overbought action in the trading market.
You can even make a trade when CCI breaks the trendline. Using this technique is, however, not recommended because it’s risky.
(Risk warning: Your capital can be at risk)
Why should you use the CCI indicator for Binary Options?
There are multiple reasons for using the Commodity Channel Index indicator. Here are three of them.
It’s great for short time periods
The CCI indicator is mostly used for short-term trading because this kind of trading does not have a large fundamental influence. That means the psychological impact is more in short trades.
So, the market will follow the direction that CCI predicts. Thus, it creates an excellent environment for winning trades.
It shows clear predictions
When you trade binary options, you should be quick because this volatile market can change its direction at any time. For making quick assumptions, it’s essential to use a powerful tool or indicator like CCI.
Using the Commodity Channel Index indicator can help you accurately predict the market movement by showing precise readings. If the environment is favorable, you can trade. But if it’s not, you can wait for the next period.
It allows short-term predictions
Another reason to use the CCI indicator is that it supports short-term predictions. It creates predictions on different time scales that you can use to apply to the next few candlesticks.
Also, these predictions can make excellent trading strategies. You can further use the strategy for maximizing the profitability of your trading.
Trading strategy with CCI indicators?
If you want to use Commodity Channel Index indicator like professionals, you should follow the right trading strategies.
Here are some of the strategies that you can follow.
Trading CCI’s extreme areas with High/Low Options
One of the easiest ways to use this indicator is with high/low options. For doing this, you should wait for the CCI to enter an extreme area. After that, you can invest in the high/low options.
If you want to make huge profitability by using this strategy, it’s important to find the right investment time.
- You can make an investment when CCI leaves the extreme area.
- You can invest when CCI enters an extreme area.
- Or you can trade when the indicator is in the extreme area and is about to turn around.
While all these investment time frames are equally profitable, here’s how they will impact your trading game individually.
If you choose to trade when the CCI indicator is leaving the extreme area, that means you are investing in a developing area. Thus, you should select a shorter expiry time to win the trade.
If you want to trade when CCI enters the extreme area, that means you are trading early. Therefore, you should wait in the market for a longer time by selecting a long expiry time.
Lastly, if you want to trade when the indicator is about to turn around, you should select an appropriate expiry time. That’s because, in this scenario, you are in between the first two trading conditions.
Combine the CCI indicator with candlestick and other option types
You can combine candlesticks with the Commodity Channel Index indicator to make better and detailed market predictions. You can then use the predictions to make a trade with a higher payout.
For this, you can either choose a candlestick formation made of one or two candles or pick a formation with more candles.
Let’s assume that you have selected a big candle with small wicks. The candle shows a strong market movement. You can then combine the CCI indicator with this candlestick to create an ideal environment for trading.
Moreover, if the candlestick is small, you should be careful while trading because a small candle does not indicate strong market momentum.
Trading CCI divergences – Here is how:
The third strategy is to trade CCI divergence with high/low options. To use this strategy, you are supposed to find a trend by surveying the market.
See this example:
After that, you can monitor CCI. You can use the high/low options if the CCI shows the same trend. But once the indicator shows divergence, you should predict the market will turn around. And then accordingly, you must select an expiry time.
In order to make this strategy successful, you should analyze the CCI indicator closely and look for the trend.
CCI dual time frame trading strategy
The last recommended trading strategy is the CCI dual time frame trading plan. This strategy uses high time frames for predicting low risk and high profitability trades.
(Risk warning: Your capital can be at risk)
Conclusion: The CCI is a powerful tool
CCI indicator is an excellent way to predict the market environment. Also, it displays clear and accurate speculations that can help you win a trade.
But it’s important to remember that just like other indicators, CCI also has certain limitations. For example, sometimes, this indicator provides poor signals.
Therefore, its essential to consider the limitations and use this indicator accordingly. Furthermore, you should also use the strategies to make successful trades with Commodity Channel Index indicator.
Frequently asked questions about CCI indicator in binary options trading:
What is the Commodity Channel Index (CCI)?
The CCI is a trading indicator that identifies market reversals by comparing current and historical price movements, oscillating between +100 and -100.
How does the CCI indicator work?
It calculates the distance between the simple moving average and the current typical price relative to the mean absolute deviation, multiplied by 0.015.
Why is the CCI indicator useful for short-term trading?
It focuses on market psychology and momentum, making it ideal for short-term trades where psychological impact is more pronounced.
What are some effective CCI indicator trading strategies?
Strategies include trading on extreme readings, combining with candlestick patterns, divergence analysis, and dual time frame trading for entry and exit points.