Trading supply and demand using CCI indicator helps you determine price direction and choose the right zones to trade.
In forex, supply and demand trading consists of buying at demand zones and selling at supply zones. Because not all supply and demand zones work all the time, we use the Commodity Channel Index (CCI) indicator to help us filter out trading signals.
In this article, I will show you how you can improve your supply and demand trading using the Commodity Channel Index (CCI).
What’s CCI (Commodity Channel Index)?
The Commodity Channel Index or CCI is a momentum-based oscillator that helps traders assess whether the asset has reached an oversold or overbought condition. It also helps determine the long-term trend direction and strength on price charts.
But because we are trading forex, currencies don’t have intrinsic value to be considered overbought or oversold. So we just use the CCI to determine market direction and strength of the trend.
Normally, the CCI indicator is a good technical tool to have on your chart if you are trading the market using the multiple time frame analysis. The CCI indicator is often used on a higher time frame chart to find the prevailing trend, and on a lower time frame chart to identify entry points and monitor pullbacks and market corrections.
How to read CCI indicator?
The CCI line oscillates above and below the zero level. The first information that we can get from the CCI indicator is the historical averages of an asset. When CCI is below zero, this means that the asset price is below the historical average. When CCI is above zero, this means that the asset price is above the historical average.
From the monthly chart above, we can see that when price creates a new historical low or high the CCI indicator trades below or above the +/-100 levels.
The second useful information is the direction of the price on a chart. For an uptrend, the CCI line starts from zero to positive 100 level. For a downtrend, the CCI line starts from zero to negative 100 level.
If the CCI line continues beyond the +100 level, it could used as a signal to watch for a strong uptrend.
If the CCI line continues beyond the -100 level, it could be used as a signal to watch for a strong downtrend.
Trade supply and demand using CCI
When we trade forex using supply and demand, we focus on identifying high probability zones to trade market imbalances. Price either goes up when demand exceeds supply or goes down when supply exceeds demand. If supply equals demand, prices range and move in a sideways trend.
Learn about identifying supply and demand zones.
Determining the trend is very important because we don’t want to trade against the long-term trend. Using the multiple time frame analysis helps us identify the supply and demand zones in control and the prevailing trend.
Once we identify the curve and the major trend, we rely on the CCI signals to trade and manage our positions.
The CCI is an oscillator indicator that oscillates between +100 and -100 levels, which means that it is a lagging indicator. A lagging indicator is an indicator that gives a trading signal after a big shift in price has happened.
Trading supply and demand using CCI indicator helps us align ourselves with the long-term trend, find entry points and manage our open positions.
1. CCI indicator to trade with the trend
During a downtrend, we trade sell signals when CCI is above +100 level and we ignore any buy signal from the indicator. As long as the price is trading below the 20 moving average, the downtrend is still valid and we only sell.
During an uptrend, we ignore all sell signals from the CCI and we buy whenever it gives a reading below -100 level. The objective is to trade in the same direction of the major trend.
As long as the trend is up (price above the 20 moving average) we only buy and we ignore all sell signals.
Let’s look at the following example, on this chart we have a demand zone that was formed during an uptrend. We could still trade this zone but here’s why we should not.
The first thing to notice is that the demand zone is not fresh; price retested the zone right at the beginning then moved higher.
The second thing is that if we draw a trendline, we’ll see that price broke below the trendline and the trend reversed from an uptrend to a downtrend. The 20 moving average confirmed the downtrend as price is trading below the moving average.
The last thing is that price created an opposing supply zone giving us a small profit margin.
The CCI indicator did not give us a sell signal after price reacted to the demand zone and went up to the opposing supply zone. This means that we have no trade so far.
What we could do instead is wait for price to move up to a supply zone and enter a short position after we get a sell confirmation from the CCI.
The supply zone we drew on this chart has a high probability of success. Price left the zone with large candles giving us at least a 2:1 risk-to-reward ratio and a good profit margin. We wait for the CCI indicator to give us a reading above +100 to confirm a short position. Price returned to our supply zone and the CCI is trading above +100 level.
We keep selling whenever price tests a supply zone and CCI gives us a sell signal. Of course, we need to keep monitoring the major charts to trade with the major trend.
In this example, price is moving up and respecting the trendline. The CCI indicator gives us a buy signal whenever price touches the trendline. We draw our demand zones and we enter a long position after we get a confirmation from CCI (reading below -100 level).
When price broke below the trendline, we stop trading buy signals from CCI and we move to the higher time frame to identify the new trend. As we can see, after price broke the trendline, the CCI indicator kept giving us buy signals and price never went up. This is why we should always trade with the major trend.
2. Managing positions with CCI
There are two ways to use CCI to manage our trading positions: we can use it to close positions or add to existing ones.
Consider the following example, we buy at demand zone with CCI trending below -100 level. The price moves up in a nice uptrend and the CCI crosses back down below the +100 level. Here we can close our position or close half of it. When CCI trends towards the zero line, it means that either the market is correcting or the trend might reverse soon.
In this example, the market is correcting with a pullback and the CCI rebounces back above the zero line. Here we can add another position to our existing trade if we did not close it.
Trading supply and demand using CCI indicator helps traders improve their trading performance. If used properly, the Commodity Channel Index (CCI) is a good tool to have on your chart.
Many traders rely on its signals to trade the market. It is just a matter of time before they realize that this is not working. Because it is an oscillator, the CCI is a lagging indicator and not all the signals are working. Otherwise, everybody would be making easy money online.
Instead, use the CCI indicator to determine the prevailing trend on a price chart and manage your trading positions to increase your profitability.