Commodity Channel Index (or the CCI as it is known) is a trend indicator and it is to be offered by any respectable broker and any trading platform. It is looking like an oscillator, having overbought and oversold levels, but actually it shows trending conditions and allows a trader to jump into a trade in a market that is trending.
The CCI travels into positive and negative territory and the decisive levels offered by brokers on the standard or default setup are the 100 and -100. However, it doesn’t mean that market is not moving above 100 or below -100. In reality, in strong trends, the 100/-100 levels are broken quite often and market has the tendency to accelerate on such moves.
Applying CCI when Trading Binary Options and CFDs
However, there is a way to trade with CCI for easier grip on the method, take a look at the videos in the article.
First of all, one needs to apply the indicator on a chart and we are using the Jforex trading platform for this educational series so make sure you know where to find the CCI and how to apply it to a chart. The next thing to do is to look at the period that is offered and make sure you are using the default settings, the 14.
It is worth mentioning that the CCI is considered to be an oscillator but sometimes on some different trading platforms it is also considered a trend indicator. However, only the fact that it is plotted below the actual chart represents the hard proof it is an oscillator. Like all oscillators in the world, it is travelling between some levels that are considered to be overbought or oversold levels. In other words, in an overbought area one needs to look for buying put options, while in an oversold area one needs to look for call options.
Watch Out for CCI Sensitivity in Turbulent Times
One important thing that needs to be mentioned here is the fact that the CCI is acting or reacting faster than the other oscillators, like RSI for example. In other words, the CCI is going into overbought and oversold territory also when market is ranging and sometimes even when ranges are really small, like in the Asian session for example, on the hourly chart CCI still makes a move above or below 100.
There are two ways to use the CCI when trading binary options and one of them is to buy call or put options by the time the -100 or +100 levels are reached. This is the classical way to use the CCI but I would insist that this works on the bigger time frames and not on the lower ones.
Using the 0 Level with CCI
Another way is to look at it as a signal for market continuation in the same direction and this can be done using the 0 level. The way to go is to plot the 0 level on the territory the CCI is travelling and by the time we have a cross below the 0 level it means the CCI is travelling for the -100, so put options are still favored. The opposite is true as well: by the time the CCI is breaking above the 0 level it means that call options are still favored as the 100 mark comes into play.
I can’t stress enough the importance of the time frame the oscillator is being plotted on and the period it is referring too: the bigger the time frame, the bigger the expiration date needs to be. The same is true for the period that it is being involved. If the oscillator takes into account 14 periods, it means values will be plotted based on the last 14 candles, but if the period is, say 100, it will take 100 candles. Definitely that the overbought and oversold levels are going to be difficult to be reached with a bigger period involved, so mind the gap.
Divergences – CCI vs RSI
Like any oscillator, it may show a divergence but from my experience this divergence is not that relevant like in the case of the RSI (Relative Strength Index). It may work in most of the cases but on the long run market may end up staying in a divergence more than a trader’s account stays solvent and this represents the biggest problem when trading divergences.
However, it depends very much what money management system is being used as being profitable trading binary options doesn’t mean that one needs to be right one hundred percent. A constant above 70% level should do the trick. This is why trading binary options is appealing to the human nature but again, sound money management is a must like it is a must in each and every trading area.
More details about the CCI, how to plot it and what to do with it can be seen in the two video recordings that are going with this chapter in our Binary Options Academy.