After my article last week on the Commodity Channel Index indicator, I received some email questions. I felt I should address those questions this week as a follow up. I want to remind you that the indicators are to be used as a confirming tool and should not be used for decision making.
Q: Could you please discuss CCI on a different time frame and zones on a different time frame?
A: You could use the CCI on a larger time frame chart to assist you in deciding whether a supply or demand zone is likely to hold or break. As I mentioned in my previous article, the positive or negative divergence is the best indication from the CCI.
Q: You said the CCI is a lagging indicator. Hence my question is, near a supply zone or demand zone say on a daily chart, can I trust the signals from the CCI on the 60 min. chart? I mean, can I look for CCI on a lower time frame, for early signals?
A: The reversals you see at supply or demand from a larger time frame will be seen first on the smaller time frame. For instance, if you see price approaching a daily supply zone, price will often give signs of trend reversing on the 60 min chart first. The CCI could show a negative divergence that indicates weakness in the bullish trend.
Q: CCI on daily and ZONE on 60 min. for TREND CONFIRMATION – Can I use CCI on the larger timeframe to jot down the trend in my rule book?
A: The CCI alone will not help you with judging the trend strength. It is an oscillator and measures overbought/oversold conditions. In a strong trend, price can remain overbought or oversold for a long time. The advantage of an oscillator comes when there is a divergence showing trend weakness at a supply or demand zone. You would be better off reading the candles or using a momentum indicator like MACD or ADX for gauging the strength of a trend.
So while I place most of my emphasis on the price action and supply and demand, I can use some indicators in a supporting role. The key is to use the right indicator and use them as supporting tools only. To learn more about these tools, come join us as Online Trading Academy today.