What it is and how to use it
What is it?
The Commodity Channel Index (CCI) is a momentum-based oscillator that measures the deviation of a security’s price from its average price. It ranges above and below a zero line, with readings above +100 indicating overbought conditions and readings below -100 indicating oversold conditions. Traders use the CCI to identify cyclical trends and potential reversal points.
Who made it?
The CCI was developed by Donald Lambert in 1980. Lambert introduced the CCI in an article in Commodities magazine (now Futures magazine). He designed the CCI to identify cyclical turns in commodities, but it is now widely used across various asset classes.
How is it calculated?
CCI = (Typical Price - SMA) / (0.015 * Mean Deviation)
Where:
Typical Price (TP) = (High + Low + Close) / 3
Mean Deviation (MD) = Average of absolute differences between TP and SMA over the lookback period
Code (ProRealTime)
How do you use it?
You can use the CCI in several ways to identify overbought and oversold conditions, gauge momentum, and spot potential reversal points. Common uses include identifying cyclical trends and divergences.
Overbought/Oversold Conditions:
Overbought: When the CCI rises above +100, it typically indicates that the asset is overbought and may be due for a pullback.
Oversold: When the CCI falls below -100, it typically indicates that the asset is oversold and may be due for a rebound.
Momentum:
The CCI can help gauge the momentum of price movements. Higher CCI values during an uptrend indicate strong momentum, while lower values during a downtrend indicate weak momentum.
Trend:
The CCI can also be used to identify trends. During strong uptrends, the CCI often stays above zero and frequently reaches +100 or higher. During downtrends, the CCI tends to stay below zero and frequently reaches -100 or lower.
Divergences:
Bullish Divergence: This occurs when the price makes a new low but the CCI makes a higher low, indicating that selling momentum is weakening and a reversal may be imminent.
Bearish Divergence: This occurs when the price makes a new high but the CCI makes a lower high, indicating that buying momentum is weakening and a reversal may be imminent.
Lookback Periods:
Shorter Periods (e.g., CCI10): More sensitive to price changes and can generate more signals, useful for short-term trading.
Standard Period (CCI20): Provides a balance between sensitivity and reliability, suitable for swing trading.
Longer Periods (e.g., CCI30): Less sensitive, generating fewer signals.
FAQ
Q: Is CCI a leading or lagging indicator?
A: The Commodity Channel Index (CCI) is a lagging indicator, it measures the difference between the current price and its historical average.
Q: What are the best settings for CCI?
A: The default setting for CCI is 14 periods, but you can adjust it to shorter or longer periods based on your strategy and the asset being traded.
Q: How does CCI compare to RSI?
A: Both CCI and RSI measure overbought and oversold conditions. However, CCI is more sensitive to price changes and can generate more frequent signals, making it suitable for different trading strategies.
Strategies using the CCI indicator
None so far.
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