Analysing the Commodity Channel Index (CCI) indicator

Understanding market indicators is crucial for successful trading, and one such key tool is the Commodity Channel Index (CCI). In this article, you will find out what the CCI is and how it is used in market analysis.

channel commodity index

What is the Commodity Channel Index indicator?

The Commodity Channel Index indicator is a trend indicator created by Donald Lambert in 1980. Initially, its objective was to identify changes in the cycles of commodities, hence its name, but it is currently used for almost any type of asset.

Its usefulness lies in detecting new trends and alerting about volatility.

How is the Commodity Channel Index calculated and interpreted?

The CCI compares current prices with average past prices defined by a moving average and is divided by the mean deviation multiplied by 1.5%:

CCI= (Typical Price – Moving Average)/(0.015 x Mean Deviation)

Typical Price= (High+Low+Close)/3

The standard parameters included in trading platforms for this indicator are:

  • Moving Average: 20 sessions (although 40 sessions are also common)
  • Constant: 0.15 (This value was given by the creator to ensure that the values will be in a range between -100 and 100 with a high probability)

The indicator was created with interpretations for changes in long-term trends in mind, hence its use was proposed for long periods of time, but traders adapted its use for shorter timeframes.

The interpretation of the indicator is very simple: if in a defined trend the indicator exceeds the +100 barrier it indicates a strong bullish trend zone; if the indicator falls below -100, it would indicate a strong bearish trend zone.

What trading strategies are most commonly used with the CCI?

There are countless strategies to use, from the most basic to those that combine with other technical indicators or vary the time frames.

a) Basic strategy: as previously mentioned, it consists of taking bullish positions when it exceeds the +100 line and closing the position when it returns to the value of 100.

  • When the indicator reaches extreme values greater than +- 100, some traders use it as a signal of overbought or oversold levels.

b) Strategy with several timeframes: this type of strategy is used to eliminate the multiplicity of signals in a short period of time. The way to implement it would be the following:

  • Analyse a long-term chart with a higher period setting for the indicator (i.e., a longer-term moving average) and determine the trend of the asset.
  • Open another shorter-term chart, for example, the standard 20 sessions.
  • Use the longer-term chart's trend analysis as a guide. When the shorter-term chart aligns with the longer-term trend, look for entry signals or parameters on the short-term chart that confirm the direction of the main trend observed in the longer-term chart.

c) Strategies with divergences: Divergences occur when the price action and the indicator display contrasting trends. One common divergence occurs when the price forms higher highs, indicating an upward trend, while the indicator shows lower highs, suggesting weakening momentum, and vice versa. Divergences are seen as potential signals of an impending trend reversal or a weakening of the current trend. They suggest a discrepancy between price and indicator momentum, hinting at a possible shift in the asset's direction.

How to add CCI to a trading strategy?

To be able to use this indicator, you must have access to a platform that includes it, such as MetaTrader, TradingView, and cTrader. If you haven't decided which platform is best for you, have a look at our reviews:

Then, you should be able to:

  • Step 1: Select the indicator
  • Step 2: Configure the parameters, such as values and timeframe.
  • Step 3: Implement your strategy as explained in the previous section.

Read more about technical analysis and indicators

Summary

The Commodity Channel Index (CCI) is a versatile momentum-based oscillator used in technical analysis to assess the strength and direction of a financial asset's price movements.

Developed by Donald Lambert, the CCI measures the deviation of an asset's price from its statistical mean. This indicator oscillates around a zero line, with extreme high and low values indicating potential overbought or oversold conditions, respectively.

Traders commonly use the CCI to identify trend reversals, overbought or oversold conditions, and potential entry or exit points in the market.

FAQs

Can the CCI indicator be used alone for trading decisions?

While the CCI is a powerful tool, traders often use it in conjunction with other indicators or technical analysis methods for confirmation.

How can the CCI be used for trend identification?

Traders use the CCI to identify trends by observing its movements above or below the zero line. Readings above zero indicate an upward price trend, while readings below zero suggest a downward trend.

Does the CCI work well in all market conditions?

The effectiveness of the CCI can vary in different market conditions. It tends to perform better in trending markets where price movements exhibit clear trends. In choppy or ranging markets, the CCI might generate more false signals due to its sensitivity to price fluctuations.

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