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In this example, the circled areas on the chart represent the times when price is declining into our predetermined and objective demand (support) levels which is where we would want to buy. We want to buy here because the risk to buy is lowest and the reward is highest. The black vertical lines on the chart right next to the circled areas show when the moving averages cross, which is a buy signal for most people. Notice how late they cross. Price has moved significantly higher already which means high risk and low reward for the buyer. In both cases, when price is into our demand level and a low risk buy is right in front of us, the MA's have not even begun to turn higher. If you use a moving average cross as a buy trigger, be very careful.

In this example, "B" is the first time price is revisiting demand level "A". "B" is the time we want to buy. "C", however, is when the moving averages finally cross and give the conventional buy signal. If you accept that invitation to buy, you are actually buying right at the supply (resistance) level "D" which will almost always ensure a quick loss. Only a novice trader buys after an advance in price and into an objective supply level. That is what the industry calls "dumb money" and in trading, if you can't see dumb money coming into the market, you are dumb money… Ok, enough negative talk here, let's get some answers and solutions to this issue…

As I mentioned in the first part of this piece, when an indicator or oscillator gives you a buy signal when price is also at an objective demand (support) level, that buy signal is likely to work. The key is to only take those buy signals and ignore the rest. In doing this, we are filtering an indicator through the laws of supply and demand and this is the key in using any indicator or oscillator, including the not so obvious things like Fibonacci and Elliot Wave.

The Answer

In this chart of the Dollar/Yen, notice CCI on the bottom and the demand level I put on the chart. While CCI gave you many overbought and oversold readings, the oversold signal that occurred as PRICE was also at demand was the buy signal to take. Exactly how to do this is something I focus on plenty in our courses at Online Trading Academy but hopefully this concept will help you out here. Also, while this is a Forex chart, the rules and concepts that I write about are applicable in any and all markets and any and all time frames.

In this example, we again have many overbought and oversold readings from CCI. They are not wrong. CCI is doing exactly what it is supposed to do. Whether these readings turn into profitable buy and sell signals is another conversation, this is what most people learn the hard way. Back to the chart… When price initially drops from the supply level, notice that the CCI goes oversold right away and stays oversold, giving the trader buy signal after buy signal as prices are dropping. Yikes! Again, if you only take the overbought and oversold readings from something like CCI (or any indicator or oscillator) as a buy or sell signal when PRICE is also at a supply or demand level, you are then filtering out most of the losing buy and sell signals and keeping most of the winning signals. Here, when price rallied back up to the predetermined supply level, CCI was also overbought and this was the sell signal to pay attention to.