The Role Of Commodity Channel Index (CCI) In Forex Trading

Developed by Donald Lambert, this method measures the relationship between a currency pair’s price, its moving average (MA) and the average’s normal deviations (D). It helps determine whether a pair has been overbought (overvalued) or oversold (undervalued). In the forex market, the CCI helps determine cyclical price trends, and when used with other oscillator indicators, can help forecast price uptrend/downtrend by identifying potential price peaks and troughs.

Other than Trending and Non-Trending Indicators, there is another indicator that can be used without conjunction with any other indicator: The Bollinger Band.

The Bollinger Band measures the price peaks and troughs with respect to previous prices. It was developed by John Bollinger in the 1980s and is the same as the moving average envelope, except that it is dynamic (while the moving average envelope is static) and it uses standard deviation to measure price volatility and not percentage (which is used in a moving average envelope).

The Bollinger Band works by creating a moving average and generating two expandable/contractible trading bands around it for market volatility. These bands are placed above and below the moving average at a distance of two standard deviations. They expand/contract according to the forex market trend, which means that when the price movement is volatile, they expand and move away from the moving average and if there is stability in the price movement, they contract and come closer to the average.

Two main uses of the Bollinger Bands are:
• Upper & Lower bands: The signal that the market is overbought is triggered when the closing price touches the upper trading band. If it touches the lower band, a signal of the market being oversold is generated.
• Price Break & Contracted Bollinger Bands: In conditions of low market volatility and contracted trading bands, the movement of price above or below the band indicates a market reversal trend. A trader should transact (enter a trading position) based on the price break direction. The situation under which the price closes inside the band is an indicator to exit and dispose off a traded pair.

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