The majority of traders base their decisions on technical analysis. Technical analysis is a method or tool that is used to make future price assumptions using market data or statistics. It involves a chart and a series of indicators and tools to draw out possible price futures. Among the commonly used indicators for technical analysis include the Moving average, RSI, Stochastic Oscillators, MACD, and many others. For this particular strategy, we’ll be using the CCI or Commodity Channel Index Indicator to identify possible opportunities in a chart at Pocket Option. This strategy with the CCI indicator will not only let you know possible entry and exit points on a chart but also how to avoid false entries and exits.
What is CCI?
The CCI or Commodity Channel Index is a momentum indicator that shows if a given asset is overbought or oversold. The CCI indicator oscillates in a channel between +100 and -100. The CCI interprets that whenever the reading is above +100, the asset is overbought which means the price can go down anytime. Whereas, if the CCI reading is below -100, it is assumed that the price will start to go up.
In essence, the CCI indicator shows a series of troughs and peaks which indicates the possible entry and exit points on a chart. Although these readings can prove to be a good buy or sell signal, they can also be prone to false signals.
CCI Indicator Settings
To use the CCI Indicator on Pocket Option, simply look for the indicator icon from the left part of the screen, and choose CCI from the list of indicators.
After which, change the input and style settings by clicking the pen icon from the CCI indicator menu located at the lower-left corner of the screen.
How to avoid false signals
As mentioned earlier, the CCI indicator shows a lot of readings of possible entry and exit points, and it signals a reversal. However, there are also instances of false signals for reversals when reading the CCI. To identify ideal entries and exits on a chart, and to avoid false signals from the CCI, here are a few steps to follow.
Look for Convergence and Divergence
Convergence on a chart means that the price is moving with the CCI indicator to a direction where both can meet at a point. Whereas divergence happens when the price and the CCI indicator move in a direction that is away from each other.
The convergence and divergence on the chart are made visible by drawing a line that connects the peaks or troughs from the CCI reading, and the high or low price from the chart.
Whenever there is a convergence or divergence, it is assumed that a possible trend reversal is about to happen. This will be the first step in this strategy using the CCI indicator.
Breakouts are events when the price breaks through a strong trend line. Trend lines are created by drawing a line that connects the higher highs or lower lows of the market. The breakout line will be the stretched-out trend line. When the price breaks through the breakout line, a breakout happens. For such events, the next price movement is believed to move in the same direction. This will be the second step to follow for this strategy using the CCI indicator.
Trading with CCI indicator
For us to fully understand the power of the CCI indicator in identifying possible entry and exit points in a chart, while avoiding false signals, let’s check out a few examples from actual charts on Pocket Option.
For this first example, let’s consider an asset that moved at an uptrend. The first step of the strategy suggests that there should be a convergence or divergence which in this case is verified as we check out the yellow lines. The price chart shows that the price has higher highs, while the CCI indicator shows lower peaks which is a clear sign of divergence.
Once the convergence and divergence instances are verified, proceed with finding the breakout point by establishing a breakout line. To establish a broken outline, simply stretch out a trend line that connects the lower lows of the price chart as shown by the white line in the image.
As soon as the price breaks through the broken outline, the price is assumed to continue moving downward. Thus, it is the signal to sell or go short.
Another example is for an asset at a downtrend. The first is to verify the instance of convergence or divergence by drawing a line using the lower lows of the price in the price chart, and the troughs from the CCI reading. Lines show convergence thus the first requirement is met.
Now proceed with identifying the breakout point by drawing a trend line that connects the higher highs of the price. Stretch out the trend line toward the left side of the screen to establish the breakout line. Once the price breaks through the breakout line, a breakout occurs. In this case, the ideal entry for a long trade or ‘buy’ would be on the breakout point.
One important thing to consider when finding markets or assets were to use this strategy is the trend strength. Make sure that the trend clearly shows its direction – whether it is an uptrend or downtrend. A strong trend that moves in a clear direction shows much lesser fluctuations in the CCI reading. Whereas markets that are moving sideways, or up and down, show extreme fluctuations on the CCI indicator. As you have more fluctuations in the readings, it becomes more difficult to identify opportunities in the chart.
It is also possible to use other tools to further improve readings and interpretations on the chart. If you’re having difficulty identifying the current trend of the market, you can use the moving average tool to have a physical representation of the current trend.
Our final thoughts
The use of trading indicators greatly helps to identify opportunities in a chart. While having more than one indicator on a chart can create confusion, having only one indicator may also prove to be insufficient. However, if a good strategy is implemented, even the use of a single indicator becomes powerful enough.
For you to fully master the use of the CCI indicator, check out the demo trading at Pocket Option. On this trading platform, you’ll be able to trade in real-time using virtual funds.
Good luck and enjoy this strategy with the CCI Indicator!
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