CCI is a popular indicator used by Forex traders to identify oversold and over bought conditions much in the same way that RSI or Stochastics is used. Though Donald Lambert created CCI back in to identify cyclical turns in commodities it is very effective with currencies. By measuring the current price relative to the average price of a set period like 14, CCI is low during time prices are below their average and high when prices are above their average.
This gives us the oversold and overbought regions. Why is this important you may ask? Well, it is simple. When we have a strong uptrend, the best place to buy is at price point where traders are no longer selling or selling pressure begins to subside. How do we know when something is oversold? This is a great question too!
Forex traders have several tools and methods at their disposal to show them when prices have fallen too far too fast and when bargain hunters may step in sending prices higher.
Like the real estate investor, we look for the value of our holdings to increase over time. Since we have bought at a relatively low price, our risk is small relative to the potential gain. Unlike real estate fixer-uppers, Forex traders can forget remodeling as time and trend work to increase the value of the position. The chart depicts four successful by signals given by CCI as it crossed down below the line and turned up. Waiting for CCI to turn above and looking for price to confirm the move, traders will enter the market long and then place a protective stop order about pips below the last swing low.
A stop could be placed just below that swing low for a target of 1. If the stop is hit, then we look for another trade! CCI is simple way to visually identify potential entries. Sign our Guestbook to gain access to this course that will help you get up to speed on Forex market basics.
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