Prices move like waves in the financial markets. They fluctuate, going off middle average values in both sides and turning back. One of the main targets for any analysis, especially the technical one, is to determine an extreme deviation of the price compared to its average value in a certain period. That would give a trader understanding when to pull the trigger counting on reversal conditions and when the upcoming trend is just gaining its strength before accelerating and going forward.
As you could already guess, this trading strategy is based on popular indicator - the Bollinger Bands. What settings does it have? Right, deviation and period. So, mathematically, it counts how far the current price has gone from its average value in the given period. The same idea lays in the basement of the second technical tool which is used in this trading technique - Commodity Channel Index (CCI). We’ve told you about the Bollinger Bands several times but the CCI indicator is a bit different and it deserves a deeper explanation.
The CCI indicator has been developed to monitor the technical analysis of commodities mainly. However, its settings and flexibility can be easily applied to other financial assets such as indices, currency pairs and shares. Lambert (that’s the name of the indicator’s designer) figured out how to find cyclical turns of the price. He set a constant to be used in the mathematical formula just to revert the settings to a visual format so traders would see a line in the indicator’s window but not a set of numbers calculating complicated stuff. As a result, the CCI indicator looks like a traditional oscillator but modified a bit.
It also has the 0 level which is approximately equal to the 50% level of RSI oscillator. But CCI has much deeper overbought and oversold levels, ‘cause it ranges from -200 to +200. It also has divergences and confirmation signals like any other technical tool. However, we’ll talk about continuation today but not about reversals, just because the ‘Bollinger Bands and CCI’ forex trading strategy is looking for the strong trend to continue and recommend buying or selling any asset when both technical indicators confirm the current trend’s strength.
Settings are standard and default for both indicators, there is no need to change anything. Any timeframe can be used in this trading technique, the only thing to remember is about the appropriate level of volatility for any given chart. The strategy also works well for any financial instrument without any changes in its efficiency or the number of signals.
COnditions to enter the market are simple, having just three stages to perform before pulling the trigger. CCI has to be monitored in the closest way here. Long positions have to be opened when CCI crosses above the overbought mark of 150 but only if it has reached oversold confirmation (level -150). The third condition is for the Bollinger Bands indicator, the current price has to be above its middle line. Sell conditions are opposite, CCI has to crossover below oversold but only if it has previously reached overbought ranges of 150 and the price is below the middle line of the Bollinger Bands indicator. As simple as that.
The stop-loss order has to be set depending on the chosen asset and timeframe. For example, in the short-term timeframes, the distance has to be 5 pips from the entry price (four-digit quotes). The take-profit order is much more aggressive in this case and the price has to touch the opposite BB band for the position to be closed manually by the current market price. Otherwise, a constant distance can be chosen. The only thing to keep in mind is to take your money and run.
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