Determine Overbought And Oversold Markets With CCI (Commodity Channel Index)

CCI, or the Commodity Channel Index to give it its full name, is one of the trend indicators which is offered by reputable binary options brokers and across all trading platforms. Although it looks like an oscillator as it has oversold and overbought levels, it actually reveals trending conditions, allowing the trader to enter into a trade in a trending market.

Commodity Channel IndexThe Commodity Channel Index travels into negative and positive territory, with the decisive levels that are offered by binary options brokers on the standard setup being -100 and 100. This does not mean however that the market will not move below -100 or above 100. In real life trading, in a strong trend, the -100/100 level will be broken frequently and the financial market tends to accelerate on these moves.

The Commodity Channel Index as a Trend Indicator or Oscillator

The Commodity Channel Index is actually an oscillator, however on some trading platforms is can also be considered to be a trend indicator. Nevertheless, CCI is definitely an oscillator as it is plotted below the chart. As in the case with all oscillators, the CCI travels between the levels which are considered to be oversold or overbought, and in an overbought area, a trader should look to purchase put options, while in the case of an oversold area, call options should be bought.

However the CCI reacts or acts much more quickly than other oscillators like the RSI. CCI will move into the oversold and overbought territory even when the market ranges, and occasionally even when the ranges are small, the CCI will still make a move below or above 100 on the hourly charts.

How to Use CCI When Trading Binary Options

One way to use CCI in binary options trading is to purchase put of call options by the time the +100 or -100 level is reached. This is ideal for use on larger time frames, although not so much for lower ones.

Another way to use CCI is to use it as a signal that the market will continue in its same direction using the 0 level. To do this, a trader must plot this level on the territory across which the CCI is travelling. When a cross forms below the 0 level, the CCI will be travelling for the -100 level, and put options should be placed. Conversely, if the CCI breaks above the 0 level, call options should be placed as the 100 mark is coming into play.
The time frame of the chart is very important here, as the larger the timeframe, the larger the expiry date must be. The period is also important, with the number of periods corresponding to the number of candles.

When using the CCI, it may, like any other oscillator, show a divergence, however it is not usually very relevant and in the majority of cases, the market will stay in a divergence. Although this may pose a problem when trading divergences, it depends on the money management system in use as making a profit in binary options trading does not require an investor to be correct 100% of the time. As long as there is a success rate of over 70%, the trader will remain solvent, however sound money management skills are paramount in any financial market trading.

Having a good understanding of the Commodity Channel Index as well as other oscillators and trend indicators is very important for a trader who wants to maximise their profits and enjoy more successfully executed trades.

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Determine Overbought And Oversold Markets With CCI (Commodity Channel Index)
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