The Commodity Channel Index (CCI) is a great indicator for binary options traders. It creates clear, unambiguous predictions that help you succeed in a fast-paced environment. This article will explain how the CCI works and how you can use it to improve your binary options trading.
In detail, this article will answer these questions:
With this information, you will be able to use the CCI to more profitably trade binary options.
The Commodity Channel Index (CCI) wants to identify market environments in which the price has moved too far from its statistical mean and has to come back.
The idea behind the CCI can be best explained with a real-life example. Think of the price of an apple over the last hundred years. At some point, the price of an apple was half of what it is today. And at some point earlier, it was a quarter of what it is today, and at some point one-eighth.
The point is, the price of an apple rose significantly and gradually. It would have been impossible for the price to quadruple overnight. If all shops had agreed at some point to raise the price of an apple from £0.1 to £1, people would have stopped buying apples and bought another fruit instead. Those shops would have had to admit their mistake and bring the price back to £0.11 – a more gradual price change.
Once customers feel more comfortable with the new price, the shops might be able to raise the price again, for example to £0.12. But for the price change to work, it has to be gradual. Otherwise, customer psychology would bring the price closer to where it was before.
The CCI adapts this idea to a market analysis formula.
Simply put, when the market is close to its statistical mean, a lot of things can happen. But when it has moved too far from it in one direction, you know that market psychology will bring it back closer to its statistical mean. The formula offers a quick reflection of this.
To identify markets in which the price has moved too far from its statistical mean, the CCI focuses on three factors:
With these three components, the CCI formula relates the distance between the current typical price and the simple moving average to the mean absolute deviation. The final result is then multiplied by 0.015 to create a more readable result.
Mathematically, the formula looks like this:
(Current typical price – simple moving average) / mean absolute deviation./ 0.015
Around 70 to 80 percent of the CCI’s readings are somewhere between -100 and +100. The other 20 to 30 percent are outside these boundaries and indicate overbought and oversold markets.
The CCI draws the result of this calculation into a price chart. The resulting line, its current value, and its change over time can tell you a lot about what is going on in the market and what will likely happen next.
In addition to its overbought and oversold areas, the CCI also creates a signal when it diverges from the market.
In an intact trend, the CCI mirrors the trend’s movements. When an uptrend creates a new high, the CCI should create a new high, too; and when a downtrend creates a new low, the CCI should create a new low, too.
When the CCI fails to create a new high/low as the trend creates a new high/low, it diverges from the market. This divergence is a strong indication that the trend has lost momentum. It is likely to end soon, and the market is likely to turn around.
Some traders also trade breaking trend lines in the CCI. These traders try to find the type of trends that you would normally trade in price action in the CCI’s movements. They establish trend lines and predict that trends will continue. When the CCI breaks a trend line, they predict that the market will turn around.
Personally, we do not recommend using this technique. As you can see in the picture above, it is difficult to identify trends in the CCI. It mostly moves in straight lines and trying to find non-existent patterns can only lead to mistakes.
The CCI offers a number of advantages that make it a great fit for binary options traders. Those advantages are:
These three characteristics are a good reason why binary options traders should get to know the CCI.
To understand how you can trade the CCI, take another look at the picture that we used earlier. As you can see there, the CCI creates very different predictions based on whether you trade its extreme areas or its failure swings.
Divergences do indeed indicate environments in which the market is likely to move closer to its statistical mean – but that is all they do.
Despite a divergence not indicating these events, they are possible. They might or might not happen – a CCI divergence simply does not allow for long-term predictions. It focuses on the short term.
Failure swings, on the other, only allow for longer predictions. They offer no short-term indication. Once you understand this essential characteristic, you can correctly trade the CCI.
Here are three strategies that do that.
The easiest way of trading the CCI is with high/low options. This strategy can be explained in two steps:
The crucial aspect of this strategy is finding the right timing to invest. You have three options:
All three options can work equally well, and you should choose the one with which you feel the most comfortable.
The important thing is to adjust your expiry to your investment time.
Try to find the perfect timing and the right expiry for you. This might require a little testing and trial and error. Use our recommendations as guidelines, but find your strategy, even if it conflicts with what we write.
As we pointed out, the CCI creates only short term predictions about the market’s direction. By adding Candlestick formations to your strategy, you can make more detailed predictions that allow you to trade binary options types with a higher payout and make more profit.
Candlestick formations are significant patterns of candlesticks that allow you to predict what will happen next. There are simple candlestick formations that consist of only one or two candlesticks and more complex formations that consist of more candlesticks, sometimes up to ten. To keep things simple, this article focuses on simple candlestick formations. You can adapt the strategy to more complex formations if you like.
One simple candlestick formation is the big candle. The big candle consists of a single candlestick that is significantly larger than the preceding candlesticks. Its body makes up almost the entire candlestick, and there are no wicks or only small wicks.
The big candle indicates a strong movement. Apparently, the market strongly moved in one direction for the entire period, which is why it is likely for this momentum to carry over to the next period.
Now let’s combine the big candle with the CCI. Assume that the CCI enters the overbought area and, a little later, the market creates a bearish big candle. Now you know two things:
Combined, both predictions create the ideal environment for trading a one touch option. These options define a target price, and as soon as the market touches this price, you win your option. One touch options require a stronger movement than high/low options but they allow you to win your option with a single touch of the target price and usually generate higher payouts.
In such a situation, it makes great sense to trade a one touch option and maximize your potential profit.
Now let’s assume that the market does not form a big candle once the CCI reaches the overbought area. It forms a smaller candlestick with a wick to both sides. While the CCI begins to fall, this candlestick does not indicate the strong momentum that the big candle predicts. Consequently, you know that you have to be careful.
In this situation, it would be better to trade a low option. You might get a lower payout, but you can win the option with the smallest possible movement in the right direction – as long as the market trades lower when your option expires, you win.
And finally, let’s assume that the market does create the bearish big candles in a row after it entered the overbought area. This formation is known as three black crows and indicates a bearish reversal.
At this point, you would have already won the trade from the first big candle. You would be able to win a second trade by predicting that the market will continue to fall. Most traders would use a low option for this prediction, but if the market environment seems right to you, you might also be able to trade a one touch option.
The point of this strategy is to show you how candlesticks and the CCI can reinforce or weaken each other’s prediction. The result is a clearer picture of the market, which allows you to trade better and more accurately.
There are many, many simple candlestick formations. The big candle is just one of them. Pick those that you like best; there is no need to rely on the big candle if you do not like it.
This strategy utilizes the CCI’s second prediction that divergences indicate the end of the existing trade. It is simple, too, but it creates predictions for the long-term.
Here’s what you do:
This is it. This strategy is simple, but it requires a little more time to execute. You have to search for trends and monitor the CCI closely. On the other hand, you get much more signals once you have found a trend.
This is an example of a strategy that utilizes the CCI’s long-term predictions. Of course, long-term predictions in the sense of binary options are relatively short compared to other assets. When you trade this strategy on a 5-minute chart, you will probably use expiries between 30 minutes and two hours. With a strategy that trades the CCI’s short-term predictions, however, you would use expiries of 5 to 15 minutes, so there is a significant difference.
The CCI indicator is a great indicator for binary options traders. It creates clear, unambiguous predictions that help you succeed in a fast-paced environment. It measures how far the market has moved away from its statistical mean and predicts that when the market moves too far, it has to move back.
You can trade the CCI’s extreme areas or failure swings. The extreme areas create short-term predictions; divergences create long-term predictions. Use one of the three strategies that we presented or adapt them to your preference.
If you still need a good broker with which to trade the CCi, take a look at our broker list.