One of the benefits to this indicator is that it can be applied to any time frame from 1 minute to 1-month chart although I prefer to use it on at least 15minute charts so that the moves are large enough to produce a viable profit for the risk.
Changing the Settings
As with the ADX the most common setting to use is 14 but as with ADX this can also be adjusted depending on your preference. A lower setting the 14 can result in a quicker reaction to identify when something is overbought or oversold. The issue with using much lower settings are they cause false signals which can cause you to trade at the wrong time or overtrade. The below example shows how this can affect the chart.
On the below example we have reduced the setting to 7 which has the obvious effect of increasing the 100 level crosses.
This indicator is one part of the oscillator group that shows when the symbol of overbought or oversold. One of the key uses is to show when there is a weakening of the trend or a reversal is taking place. The indicator visualizes the peaks and troughs of the market allowing you to enter at the start of a trend and exit at the end.
The indicator that can be found on most MT4 platforms and shown in the examples below uses a moving average style line that smooths out the data used to calculate it. The indicator appears as a separate window below the chart.
The CCI indicator usually displays a reading within the +100 to -100 level as shown above. When the CCI moves above or below these levels it indicates that the market is either overbought or oversold. A reading above +100 indicates that the market may be overbought and a reading below-100 can mean the market is oversold.
On the below example you can see where a trader will look to enter and reverse the trade when the CCI goes into an overbought or oversold territory. The red circles show where you would go short and then the green circles are where you would reverse the trade and go long.
When testing different setting the main thing to look for is what helps to improve your results. They can also be used together to help you get into the position at the earliest using the low settings and confirm it by the longer setting.
The example above is in real time to when this analysis is done showing a possible sell signal with both the long and short time frames indicating the market is currently oversold.
As the chart shows, during a ranging market at the start many false signals are given that would lead a someone to over trade during a low volatility period. But one use is to look for when the market goes well into the overbought or oversold territories as these can be great signals for where to enter your trade.
The longer the time frame used the slower the reaction time but the results are often more accurate and false signals are removed. On the below example there are only a few crosses which give great entry and exit points.