Commodity Channel Index (CCI)

What Is the Commodity Channel Index (CCI)?

The Commodity Channel Index (CCI) is an energy based oscillator used to help decide when a investment vehicle is arriving at a condition of being overbought or oversold.

Developed by Donald Lambert, this technical indicator evaluates price trend heading and strength, allowing traders to decide whether they need to enter or exit a trade, forgo taking a trade, or add to an existing position. Along these lines, the indicator can be utilized to give trade signals when it acts with a particular goal in mind.

The Formula for the Commodity Channel Index (CCI) Is:

$\begin &\text = \frac{ \text - \text }{ .015 \times \text } \ &\textbf\ &\text = \textstyle{ \sum_ ( ( \text + \text + \text ) \div 3 ) } \ &P = \text \ &\text = \text \ &\text = ( \textstyle{ \sum_ \text } ) \div P \ &\text = ( \textstyle{ \sum_^ \mid \text - \text \mid } ) \div P \ \end$

The most effective method to Calculate the Commodity Channel Index

1. Decide the number of periods your CCI that will dissect. Twenty is normally utilized. Less periods bring about a more volatile indicator, while additional periods will make it smoother. For this calculation, we will assume 20 periods. Adjust the calculation if utilizing an alternate number.
2. In a calculation sheet, track the high, low, and close for 20 periods and register the regular price.
3. After 20 periods, register the moving average (MA) of the ordinary price by summing the last 20 run of the mill prices and isolating by 20.
4. Calculate the mean deviation by taking away the MA from the ordinary price for the last 20 periods. Sum the absolute values (overlook minus indications) of these figures and afterward partition by 20.
5. Embed the latest run of the mill price, the MA, and the mean deviation into the formula to figure the current CCI perusing.
6. Repeat the cycle as each new period closes.

What Does the Commodity Channel Index Tell You?

The CCI is primarily utilized for spotting recent fads, looking for overbought and oversold levels, and spotting weakness in trends when the indicator separates with price.

At the point when the CCI moves from a negative or close to zero area to over 100, that may demonstrate the price is starting a new uptrend. When this happens, traders can look for a pullback in price followed by a rally in both price and the CCI to signal a buying opportunity.

A similar concept applies to an emerging downtrend. At the point when the indicator goes from positive or close to zero readings to below - 100, then a downtrend may begin. This is a signal to escape longs or to begin looking for shorting opportunities.

In spite of its name, the CCI can be utilized in any market and isn't just for commodities.

Overbought or oversold levels are not fixed since the indicator is unbound. Consequently, traders take a gander at past readings on the indicator to get a feeling of where the price reversed. For one stock, it may will generally reverse close to +200 and - 150. Another commodity, meanwhile, may will generally reverse almost +325 and - 350. Zoom out on the chart to see bunches of price reversal points, and the CCI readings at those times.

There are likewise divergences — when the price is moving the other way of the indicator. In the event that the price is rising and the CCI is falling, this can show a weakness in the trend. While divergence is a poor trade signal, since it can last a long time and doesn't necessarily bring about a price reversal, it tends to be really great for basically warning the trader that there is the possibility of a reversal. Along these lines, they can fix stop loss levels or hold off on steering new trades in the price trend bearing.

The Commodity Channel Index versus the Stochastic Oscillator

Both of these technical indicators are oscillators, however they are calculated in an unexpected way. One of the main differences is that the Stochastic Oscillator is bound somewhere in the range of zero and 100, while the CCI is unbounded.

Due to the calculation differences, they will give various signals at various times, for example, overbought and oversold readings.

Limitations of Using the Commodity Channel Index

While frequently used to spot overbought and oversold conditions, the CCI is highly subjective in such manner. The indicator is unbound and, in this way, prior overbought and oversold levels may have little impact from now on.

The indicator is likewise lagging, and that means now and again it will give poor signals. A rally to 100 or - 100 to signal a recent fad may come too late, as the price has had its run and is starting to correct as of now.

Such incidents are called whipsaws; a signal is given by the indicator however the price doesn't follow through after that signal and money is lost on the trade. If not careful, whipsaws can happen often. In this way, the indicator is best utilized related to price analysis and different forms of technical analysis or indicators to help affirm or dismiss CCI signals.

Highlights

• The Commodity Channel Index (CCI) is a technical indicator that measures the difference between the current price and the historical average price.
• The CCI is an unbounded oscillator, meaning it can go higher or lower endlessly. Thus, overbought and oversold levels not set in stone for every individual asset by taking a gander at historical extreme CCI levels where the price reversed from.
• At the point when the CCI is over zero, it demonstrates the price is over the historic average. On the other hand, when the CCI is below zero, the price is below the historic average.