Commodity Channel Index, CCI

What is Commodity Channel Index (CCI) ?

The Commodity Channel Index (CCI), originally developed by Donald Lambert in 1980, is an oscillator. The commodity channel index (cci) is a flexible predictor that can be used to identify unusual situations or warn of a new pattern. Lambert originally developed CCI to identify cyclical shifts in commodities. Indices, ETFs, stocks and other securities can be successfully applied to the indicator.
 
In addition, the CCI calculates the present market trend for a specified period of time compared to the historical price point. CCI is relatively high when prices are well above average, but relatively low when prices well below average. In this way, CCI can be used to identify levels that have been overbought and sold over.
 
The indicator has grown since its introduction. It is now a very common tool for traders to identify cyclical trends not only in commodities but also in equities and currencies. Through adjusting the average duration the CCI may be tailored to the business timeline traded on.

Understanding the Commodity Channel Index as an Indicator

The Commodity Channel Index (CCI) is a momentum oscillator that seeks to explain whether an asset is overbought or oversold. This lets you recognise peaks or troughs in the price of an commodity which may signify a pattern slowing or end and a course shift. It implies that, in principle, when a pattern is beginning, you will reach a trade correctly, or leave an established trade until it turns against you.
 
CCI indicator is displayed as a moving average line on charts. It is shown using a moving average style line on charts which smoothens out the analyzed results. As an indicator based on momentum the CCI index belongs to the group of indicators of oscillators. Typically, such indicators move around fixed values, and may represent changes in volume or momentum. The oscillator’s most common values range from 0 to 100, or from –100 to +100. These metrics are usually positioned under the market chart in the sub-window.
 
Indicators such as the CCI are used in forex markets to define overbought and oversold market situations. It may also be used in many other forms. In addition to defining the overbought and oversold situations (ob/os), you may also calculate the power of the pattern using the cci in fx trading. Alternatively, forex traders often use the CCI indicator (when patterns are the best or weakest) to warn of severe market conditions.
 
Many forex trading beginners generally use a uniform set of rules to apply a technical indicator. Traders instead enforce the guidelines irrespective of whether or not the stocks are rising. No surprise then that most beginners complain that the product channel index indicators do not function as planned. What many do not know is that indicators like the CCI can differ completely from the changing conditions of the market. Therefore, they do not succeed in optimum outcomes when utilizing them in a typical way.

How Does the Commodity Channel Index Work ?

Over a period of time, the CCI compares the current price to the average price. The indicator, moving in positive or negative territory, fluctuates above or below zero. Although most values fall between -100 and +100, about 25% of values fall beyond this band, suggesting a lot of market movement weakness or power.
 
Note: CCI is an unbound oscillator, which ensures there are no restrictions to upside or downside. This makes it subjective to interpret an overbought or oversold condition. Security will start to push higher when the cci becomes overbought. The defense will also go lower when the cci is oversold.
 
When trying to read overbought or oversold conditions, use the CCI in conjunction with additional indicators or price analysis. A period refers to the amount of price bars that will be included in the indicator’s calculation. The price bars can be one-minute, five-minute, regular, weekly, monthly, or any timeline that you may view on the charts. 6 the longer the specified duration (the more bars in the calculation), the less often the indicator travels below -100 or +100.
 
Short-term traders favor a shorter duration as it offers more cues. (fewer market bars in the calculation). Whereas longer-term traders and creditors prefer a longer period such as 30 or 40. To long-term traders, the usage of a regular or weekly chart is advised. Whereas short-term traders may extend the measure to an hourly chart or even a one-minute chart.
 

How to use Commodity Channel Index ?

Traders can use the basic Commodity Channel Index strategy during a range-bound market to identify trading opportunities based on overbought or oversold levels. The theory behind the Commodity Channel Index approach is that the assumptions are that prices should continue to fall under overbought market conditions. When the sector is in oversold state demand growth is expected.
 
Therefore, as the CCI rises over 100 or below -100, traders will take a short or long position, or they may reach a opposite position from the trend direction at CCI spikes such as +-200 or more. Of course, the values and interpretation overbought and oversold are subjective and also for different types of instruments it is different.
 
However, traders use the signals generated by the oversold and overbought alerts to buy and sell. Detecting either market condition does not mean that the price reversal will take place and that the associated position should be opened immediately. The reason is that overbought or oversold conditions can persist for an undefined amount of time in times of strong trends, such as days, weeks, etc. Some traders are seeking potential bullish and bearish differences between the price action and the CCI movement to filter out false signals. Traders that use the Divergence signals to set up a commodity channel index trading strategy as they point to possible pattern reversal when the momentum is not in line with the price change.
 
Therefore, when the price makes a lower low, bullish divergence is evident, while CCI forms a higher low. When the price makes a higher high, a bearish divergence is created, but the CCI makes a lower high. A word of caution here would also be that traders should use other indicators to confirm their signals, particularly when the price is moving in a strong trend because the signals can be misleading as well.
 
Do not forget that as long as it is used correctly, the CCI can be a practical indicator that can provide valid trading signals. Therefore, to reduce possible losses that can result from false signals, you can adjust the cci environment, such as the amount of periods and the trading method.

How to Calculate the Commodity Channel Index

CCI = (Typical Price – 20-period SMA of TP) / (.015 x Mean Deviation)
 
Typical Price (TP) = (High + Low + Close)/3
 
Constant = .015
 
There are four steps to calculating the Mean Deviation:
 
First, subtract the most recent 20-period average of the typical price from each period’s typical price.
 
Second, take the absolute values of these numbers.
 
Third, sum the absolute values.
 
Fourth, divide by the total number of periods (20).

Formula for the Commodity Channel Index

The CCI indicator is plotted according to the following formula:
 
CCI = (0. 015*Standard Deviation) / (Typical Price–SMA)
 
The arithmetic mean of any minimum, maximum and close values of the candle is in this formula “Typical Price”.
 
SMA is a normal moving average line over a specified span calculated by standard prices. 015 is the constant calculated experimentally. Standard Deviation is a simple moving average (Typical Price–SMA) plotted not by typical prices, but by value.
 
That is, you need to remove from the standard market value a basic moving average value, and then once again sum the value produced by the SMA method. The Moving Average is always the same.
 

Commodity Channel Index Basic Strategy

For movement above +100, which generates buy signals, and movements below -100, which generates sell or short trade signals, a basic CCI strategy is used to track the CCI. 6 Investors may only want to take the buy signals, exit when the sell signals occur, and then re-invest when the buy signal occurs again.
 

Multiple Time-frame Commodity Channel Index Strategy

We will also use the CCI over different timeframes. The prevailing pattern is defined by a long-term map, whereas a short-term chart identifies pullbacks and points of entry into that trend.
 
Most aggressive traders usually employ a different timeline approach, and this may also be used for day trading, as the “medium-term” and “short-term” is proportional to how long a investor needs to hold their positions.
 
This indicates an upward trend when the CCI moves above +100 on your longer-term chart, and you only watch for signals on the shorter-term chart to buy them. The trend is considered up until the CCI dips below -100 in the longer term.

What Does The Commodity Channel Index Strategy Tell You ?

The Commodity Channel Index is used as an oscillator to define pattern intensity and demand spikes. Whether traders define this is up to the researcher, of course. When the CCI is outside the +100 to -100 bound, some may interpret price extremes and thus look for price reversals in those areas.
 
However, another trader may consider a CCI of above +100 to be an indicator of breakout and continue to deal with the pattern until the cci is below +100. Likewise, a CCI below -100 and a signal to take a short position could be interpreted as a robust downtrend. When the indicator diverges with demand, the cci is mainly used to detect new patterns, monitor for overbought and oversold rates, and spot vulnerabilities in trends.
 
When the CCI moves to above 100 from negative or near-zero territory, that may indicate that a new uptrend is starting at the price. When this occurs, traders should wait for a stock pullback accompanied by a rebound to indicate a trading chance in both demand and the cci.
 
The same concept applies to the downtrend that is emerging. A downtrend can begin when the indicator ranges from positive or near-zero readings to below -100. It is a warning for shorting openings to get out of longs or to continue viewing.
 
The levels overbought and oversold are not fixed because the indicator is unbound. Hence, traders look to the indicator’s past readings to get a sense of where price reversed. It may tend to reverse to nearly +200 and -150 for one stock.
 
Another commodity could tend to reverse close to +325 and -350. Zoom out onto the chart to see lots of price reversals and the CCI readings at those times. There are divergences, as well. It happens where the market shifts in one direction while the measure points in another.
 
When the price is rising and the CCI is declining, the pattern can be low. although variance is a bad trading indicator, it may be useful for at least informing the investor that there is the likelihood of a turnaround because it may last a long while and doesn’t necessarily end in a price reversal. This means they can strengthen stop loss rates or keep off in the direction of market movement by taking new trades.
 

Limitations of the Commodity Channel Index

The indicator often lags, meaning it will often send weak signals. A rally to 100 or -100 could come too late to signal a new trend, as the price has run its course and is already starting to correct. Such incidents are called whipsaws; an indicator gives a signal but the price does not follow after that signal and money is lost on the trade.
 
The CCI basically tells you that an asset’s price may be out of line relative to its historical average, but this may be the case for legitimate fundamental reasons. The valuations of certain securities–and occasionally indices or whole asset classes–sometimes undergo very rapid and justified changes. If used as an indicator of price reversal, the CCI may view this shift as an unsustainable step. But the price of assets is not always a reversal.
 
This will tend to produce a trend if and when more market participants catch on to the idea of a market moving in a specific direction. That is why such a typical feature of technological research is to track the pattern.
 
The CCI falls into a different category as a momentum-based oscillator. They could be considered an indication that an up-move has plenty of buying behind it and could run further instead of readings above +100 being seen as “overbought.
 
Athough values above +100 and below -100 that signify “overbought” and “oversold” conditions respectively, price would revert to more normative rates is not a reliable signal. Around 75 percent of the CCI’s measurements would come under these particular levels, ensuring it would send off a possible trading signal around 25 percent of the time.
 
Given the ambiguity as to whether such values reflect breakouts or intense rates, it is preferred to generate signals with other indicators.

Conclusion

The CCI indicator is a important instrument which can be used by traders in their technical analysis.
Although the CCI indicator can seem similar to most other oscillators, it is unique in that the indicator is used to calculate market momentum on the basis of the typical price seen in the chart.
 
A typical price that considers a high , low and close price is a better measure of momentum than just a closing price.
 
Closing prices are frequently used with several other oscillators, such as the Relative Strength Index ( RSI), and this is where the CCI indicator is different.
 
Whether you use CCI to confirm trends or look for reversals, its quantifying momentum capabilities must not go unnoticed. As with most indicators, CCI is generally used in combination with others not as a stand-alone indicator.

FAQ's

Commodity Channel Index tracker may be used by traders to track market trends that are overbought or oversold. You can find it below the price chart when plotting the commodity channel index as a line oscillating within the box. The Indicator should be remembered as being an unbounded oscillator.
 
However, though some trading platforms have the option for the trader to adjust the range, the range from 100 to–100 is offered by default. The default cci indicator system is 20 cycles that you may adjust the amount of periods according to your preferences.
 
Keep in mind that CCI will be more volatile for a shorter period and higher portion will be above or below the values of 100 and -100. Of course, the longer CCI period will mean that there will be a smaller percentage outside the range of 100 do -100.
 
Traders interpret the CCI readings over 100 as the probability that an uptrend may begin, whilst an warning for the start of a downtrend may be a reading below -100.