The CCI indicator was developed in the late 1970s by Dr. Alan Hull. It was designed to identify cyclical turns in commodities, but can also be used in other markets. The CCI measures the current price level relative to the average price level over a specific time period. When the CCI is above 100, it indicates that prices are higher than the average, while a reading below 100 indicates that prices are lower than the average.

• You have to remember that CCI is an unbound indicator, which means it has no upsides or downsides.
• In the former case, it will help you spot overbought and oversold signals.
• When those signals are correct, however, it will get you into trends much sooner, resulting in larger profit potential.
• The definition of overbought or oversold varies for the Commodity Channel Index (CCI).
• Moreover, combining CCI signals with price action patterns like candlestick formations can offer more reliable entry and exit signals.

Thus, traders can be prepared to open a buy or a sell position when the price is low or high respectively. Below are the most popular CCI strategies that are used by investors. When the PSAR and the CCI are combined, they form an efficient tool for day trading. This type of trading strategy is enforced by adding the dynamic 20 EMA indicator.

Don’t Rely Solely on CCI

Moreover, combining CCI signals with price action patterns like candlestick formations can offer more reliable entry and exit signals. Values above +100 indicate an overbought condition, suggesting a potential downward reversal. Conversely, values below -100 indicate an oversold condition, suggesting a potential upward reversal. The CCI, or Commodity Channel Index, was developed by Donald Lambert, a technical analyst who originally published the indicator in Commodities magazine (now Futures) in 1980. Despite its name, the CCI can be used in any market and is not just for commodities. Notice here how the line moves outside the key levels only a few times and how it tends to remain at or beyond those levels for much longer.

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The Commodity Channel Index was created back in the 1980s by the famous trader Donald Lambert. The Commodity Channel Index (CCI) is calculated by determining the difference between the mean price of a security and the average of the means over the period chosen. This difference is compared to the average difference over the time period.

How is the cci indicator used

The bullish divergence would be confirmed when the CCI turns upwards and crosses above the zero line or a specific threshold, generally -100. The CCI was originally developed to spot long-term trend changes but has been adapted by traders for use on all markets or timeframes. Trading with multiple timeframes provides more buy or sell signals for active traders.

Advantages of Using the CCI to Help Make Trading Decisions

As you may guess by now, the only indicator you need to spot new market cycles is the CCI indicator. The CCI indicator was created by Donald Lambert and was initially used to identify cycles in the commodity market. However, it tends to perform the same in the stock market or the Forex currency market and even the cryptocurrency market for that matter. The numerator of the formula of the CCI is the difference between the Typical Price and its Simple Moving Average over the N periods. The denominator is the Mean Deviation multiplied by 1.5%, which is used to scale the CCI. Tradimo helps people to actively take control of their financial future by teaching them how to trade, invest and manage their personal finance.

Global Leading Indicators

Watch our free 7-minute tutorial on how pro traders harness unusual option activity. In the example GIF above, the CCI is beginning to hinge lower — no longer making “higher highs” even as the what is trend trading market continues to press higher. This “divergence” identifies the separation between what the market is doing on the surface and the mechanics of what’s happening underneath the surface.

The percentage of CCI values that fall between +100 and −100 will depend on the number of periods used. A shorter CCI will be more volatile with a smaller percentage of values between +100 and −100. Conversely, the more umarkets forex broker: company background periods used to calculate the CCI, the higher the percentage of values between +100 and −100. Although this can be said for practically every technical indicator, we can’t miss highlighting its importance here, as well.

There are three sizable divergences over a seven-month period, which is actually quite a few for just seven months. First, UPS raced to new highs in early May, but CCI failed to exceed its March high and formed a bearish divergence. A support break on the price chart and CCI move into negative territory confirm this divergence a few days later.

It is a great chance for investors to open buy or sell positions using an efficient trading tool called the CCI divergence. When the CCI exceeds the value of 100 or falls below -100, it is considered that the market enters the overbought or oversold levels respectively. The fact that The Commodity Channel Index indicator has been in use now for over 30 years is a testament to the value placed on it within guide to successfully outsourcing software development the technical analysis community. 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.

How can Using the CCI be Made More Reliable?

The average price per gallon was $3.68 as of Oct. 9, down 15 cents a gallon since Sept. 25, according to the Energy Information Administration. The CCI indicator (Commodity Channel Index) is one of many oscillating trading indicators and many of them are pretty similar. The CCI indicator is good, but there are better, for example, the RSI indicator. Based on the simulations we decided to backtest the CCI indicator by using a 9-day lookback period and a buy threshold of -90. However, this is a backtest that might be susceptible to curve fitting.

Conversely, they will look to buy when the CCI indicates oversold conditions — entering their trade when the indicator crosses the -100 back to the upside. The Commodity Channel Index indicator takes a security’s change in price and compares that to its average change in price. CCI’s calculation produces positive and negative values that oscillate above and below a Zero Line. Typically a value of 100 is identified as overbought and a reading of -100 is identified as being oversold. The thesis here is that one should have a small handful of indicators and technical tricks that are well-known by other market participants, to rely on when crafting trade set-ups. The commodity channel index is an oscillator that identifies overbought/oversold levels to tell the direction of the trend.