What Is the Commodity Channel Index CCI? How To Calculate

Because about 70 to 80 percent of the Cci indicator values are between +100 and -100, a buy or sell signal will only generate20 to 30 percent of the time. The more periods used to calculate the CCI, the higher the percentage of values between +100 and -100. Commodity and historical index data provided by Pinnacle Data Corporation.

Signals appear frequently, such a frequency can cause a trader to overtrade. It is also necessary to take into account important financial news, they can bring significant price fluctuations and changes in the technical analysis picture of the market. Therefore, I recommend starting intraday trading only after a detailed study of the CCI indicator and gaining experience in trading in longer timeframes.

Another commodity, meanwhile, may tend to reverse near +325 and -350. Zoom out on the chart to see lots of price reversal points, and the CCI readings at those times. The CCI is primarily used for spotting new trends, watching for overbought and oversold levels, and spotting weakness in trends when the indicator diverges with price. The CCI is calculated so that 70-80% of all price activity falls between +100 and -100 on its vertical scale.

What is the CCI indicator Indicator?

You should, by now, have arrived at the Typical Price, Moving Average , and Mean Deviation values for at least one time period. You can now use the CCI indicator formula to compute CCI values. Once you have the Typical Price for at least 20 periods, calculate the Moving Average of the Typical Price totalling the last 20 prices and divide the result by 20. Note that both your profit and loss will be calculated using the full position size, not just your initial deposit. In the second case, the CCI indicator reaches level – 200, and there is a Bullish Engulfing pattern in the chart.

DTTW™ is proud to be the lead sponsor of TraderTV.LIVE™, the fastest-growing day trading channel on YouTube. While divergences are useful, the challenge is that they usually take a lot of time to form and develop. The TP is known as the Typical Price and is calculated by adding the high, low, and close and dividing the result by 3.

Low negative readings indicate that prices are well below their average, which is a show of weakness. As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive divergence below −100 would increase the robustness of a signal based on a move back above −100. A negative divergence above +100 would increase the robustness of a signal based on a move back below +100. For scaling purposes, Lambert set the constant at 0.015 to ensure that approximately 70 to 80 percent of CCI values would fall between −100 and +100.

• It should be mentioned that the bullish trend will remain as long as the asset’s price stays over the latest swing low.
• When this happens, it is usually a signal that a reversal is about to happen.
• It is often used for detecting divergences from price trends as an overbought/oversold indicator, and to draw patterns on it and trade according to those patterns.
• In the future, such digital CCI measures can be analyzed at your own discretion and used with another technical indicator reflecting the market state.
• The CCI is mainly used through overbought and oversold crossovers and divergences.

The MACD is another type of momentum indicator popular in the trading world due to its high accuracy and effectiveness. It is a more complex tool that uses the Moving Average to find the momentum and trend direction of an asset. The CCI indicator, in contrast, presents the oversold and overbought areas earlier than the MACD. Moreover, it is used to present the deviation from the average price. CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when the CCI dips below −100 and overbought when it exceeds +100.

The 0.015 constant is simply a statistical adjustment to make most of your CCI values fall between -100 and 100. You can repeat the process for any new periods by simply dragging down the formulas in the spreadsheet. Calculate the Mean Deviation by summing the last 20 absolute Deviation values (without the – signs) and then divide the result by 20.

Plan your trading

Cory is an expert on stock, forex and futures price action trading strategies. Normal oscillations will occur within the range of +100 and −100. Readings above +100 imply an overbought condition, while readings below −100 imply an oversold condition. As with other overbought/oversold indicators, this means that there is a greater likelihood that the price will correct to more representative levels. In this case, notice how the CCI indicator falls below -100 and stays there.

Commodities markets have a long history of liquid trading conditions, meaning traders can look back at past data to back test and see how it has performed over the years. It is helpful to know that the CCI indicator has its limitations. To calculate the CCI indicator, you will need to find High, Low, and Close price data for your security of interest . Once you have the required data, compute the Typical Price by calculating the average of High, Low, and Close prices for each 20 periods. Additionally, the CCI enables you to track momentum shifts in different directions and volume indicators over a given period to determine if a pattern is developing. It is impossible to say definitely which is better, MACD or commodity channel index CCI.

By drawing their information from different perspectives, they are likely to make potentially more successful trading choices. Below are listed the most common combinations of CCI with different indicators. When CCI leaves the oversold zone, and the price line intersects the moving average chart from below, a buy order is opened. When using the CCI indicator, you only need to adjust the length or its duration. By default, most trading platforms provide 20 as the length of the indicator.

Therefore, it is of utmost importance that traders pay attention when the cci divergence occurs. When this occurs, it is a warning to the trader that price is likely to undergo a correction. So far we have learned what momentum is, and how the cci indicator is used to signal the momentum in price. Now, it is time to understand the cci calculation to get a complete view of how the indicator plots the values. The CCI indicator or the commodity channel index indicator, as we have just learned is an oscillator.

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The strategies and indicators are not without pitfalls, and adjusting strategy criteria and the indicator period may provide better performance. The Kairi Relative Index is a technical analysis indicator used to indicate potential buy and sell points based on overbought or oversold conditions. The CCI is an unbounded oscillator, meaning it can go higher or lower indefinitely.

• As with all technical indicators, it is not always necessary to know how the CCI indicator is calculated.
• You can use to trade all assets, including stocks, currencies, and exchange-traded bonds.
• When you have an idea of the primary trend, trading with the CCI indicator won’t be difficult.
• A shorter CCI will be more volatile with a smaller percentage of values between +100 and −100.

However, this indicator can also provide highly reliable signals to enter the market. Like the CCI, it ranges between zero and 100, with moves above 70 being the overbought and those below 30 being oversold. The chart below shows a 20-day CCI and a 20-day RSI in a chart. Therefore, the CCI can be used to identify an overbought or an oversold level. In most trading platforms like the MT4 the default period that is used is 14 .

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It is this second move that is bought and that brings the best chance of profits. The CCI is categorized as a momentum oscillator, which means that CCI is used to identify overbought and oversold levels. While divergences reflect a change in momentum that can foreshadow a trend reversal, chartists should set a confirmation point for CCI or the price chart. A bearish divergence can be confirmed with a break below zero in CCI or a support break on the price chart.

A bullish divergence occurs when the underlying security makes a lower low while CCI forms a higher low, which shows less downside momentum. In the above example of a pro’s trade, you see that the general oil trend is up; it started in April 2020. A bullish signal appears on November 9, 2020, when the CCI line crosse level 0 upside. Next, the price starts growing, which is a good buying opportunity. A signal to buy is sent when the indicator line crosses level 0 from the bottom up. At the same time, the general trend for the instrument should be up.

The reduction factor is also called the “Lambert constant”. Its value is constant and is designed to fit 2/3 of the absolute deviation values in the interval [-100, 100]. When you want to trade in a correction, it is advised to expect when the index goes beyond the level of +100 or -100, and then begins to return back to the neutral zone.

In this way, the indicator can be used to provide trade signals when it acts in a certain way. When the markets are range bound, the CCI can be used to signal overbought and oversold conditions. This can be especially useful for traders who want to trade breakouts or to trade within the ranges. You have the 50 and 20 period exponential moving average applied to the price chart. When the short term moving average is above the long term moving average , it signals an uptrend.

https://forex-world.net/ is available as a SharpCharts indicator that can be placed above, below or behind the price plot of the underlying security. Placing CCI directly behind the price makes it easy to compare indicator movements with price movements. The default setting is 20 periods, but this can be adjusted to suit analysis needs. A shorter timeframe makes the indicator more sensitive, while a longer timeframe makes it less sensitive. Members can click the green arrow next to “advanced options” to add horizontal lines to mark overbought or oversold levels. Two lines can be added by separating the numbers with a comma (200,-200).

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Besides overbought/oversold levels, CCI is often used to find reversals as well as divergences. Originally, the indicator was designed to be used for identifying trends in commodities, however it is now used in a wide range of financial instruments. The CCI indicator is an oscillator tool that is very popular amongst investors.

Time and time again it is demonstrated how important momentum is when analyzing the market and attempting to determine future moves. Whether you are using CCI to confirm trends or to look for reversals, its momentum quantifying prowess should not go unnoticed. Like most indicators, CCI is best used not as a stand-alone indicator but in conjunction with others. The Commodity Channel Index indicator is also suitable for intraday trading, like most technical analysis tools. In this case, the trader should switch to the M5 or M15 timeframe.

For this reason, overbought and oversold levels are typically determined for each individual asset by looking at historical extreme CCI levels where the price reversed from. The commodity channel index is an oscillator originally introduced by Donald Lambert in 1980. In this article, we have learned how the CCI indicator is calculated and how to use it in trading. The CCI indicator is an additional powerful tool for those looking to trade volatile markets, and if you care about making a profit, it is not to be ignored. You can use both indicators interchangeably since they’re momentum oscillators. This means that you can identify patterns of emerging trends or price divergences that can offer opportunities to take a position.