CCI

Definition:

The Commodity Channel Index or CCI technical indicator was originally published by Donald Lambert in a Commodities Magazine article. The oscillator indicator was originally designed to help traders identify cyclical trends in commodities, but it also has applicability to currency and stock market trading.

Traders typically use the CCI to determine overbought and oversold levels. In addition to that common usage of the oscillator, they might also use price/indicator divergence and trend breaks seen on the CCI graph to generate trading signals.

Sample Chart:

Usage:

The Commodity Channel Index can generate a variety of buy and sell signals as follows.

Overdone Levels

Traders sometimes use the CCI to show where the market has become oversold or overbought, and hence might be due for correction. Oversold levels generally fall below -100, while overbought levels exceed +100.
A trading signal to go long could result from a move from oversold CCI levels to back over -100. While a short trade might be signaled by the CCI returning below +100 after being in overbought territory.

Trend Breaks

Traders often draw trend lines on the CCI chart between peaks or dips and then look for breaks to generate signals. When the CCI is oversold below -100, and has broken above a downward-sloping trend line, then that would give a bullish signal. Similarly, when the CCI is overbought above +100, and has broken below an upward-sloping trend line, then that would give a bearish signal.

Divergence

When the CCI shows positive or bullish divergence relative to the market price in oversold territory under -100, then that would generate a bullish signal when the CCI moves back above -100. Negative or bearish divergence seen in the CCI when overbought above +100 would generate a bearish signal when the CCI falls back below +100.

Calculation Method:

Define:

• n= the number of the time period bar in question.
• N= the number of time periods in the averaging process.
• High(n)= The high price traded during time period n.
• Low(n)= The low price traded during time period n.
• Close(n)= The closing price at the end of time period n.
• TPX(n)= Typical Price of time period n.
• SMA(A,B)= Simple Moving Average of data item A over B periods.
• ABS(A)= The Absolute Value of data item A.
• DEV(n)=The Deviation of the price from its mean at time n.
• CCI(n)= The Commodity Channel Index value at time period n.

Calculate:

• TPX(n) = [High(n)+Low(n)+Close(n)]/3
• DEV(n) = ABS[TPX(n) — SMA(TPX(n), N)]
• SMA(DEV(n), N) = SUM[DEV(n), N]/N
• CCI(n) = (1/0.015) * [TPX(n) –SMA(TPX(n),N)]/ SMA(DEV(n), N)

Practice CCI Trading

Technical analysis with CCI is a demanding skill that requires practice to master. We recommend that you use a demo account to train yourself for free before applying your skills to real money trading.
Most reputale trading platforms today (for example: GFC Trader, AVA Trader, Meta Trader) feature technical indicator functions which can be applied on real-time charts. You can open a free account, download the trading software and start sharpening your technical analysis skills today!

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