Commodity Channel Index CCI How to Use The CCI Indicator

Ιf today’s value is lower than the last day’s value, it is added to the OBV. In the financial market, traders use various tools to plan a profitable investment strategy and boost their winning rates. The commodity channel index is an oscillator that identifies overbought/oversold levels to tell the direction of the trend. Having the CCI set higher will result in the reading changing much less frequently. This will keep you in trades longer, helping to avoid false signals.

Alternatively, zones over the +100 and below the -100 marks indicate overbought and oversold price levels. In the former case, when the price moves above +100 and gets back below it, traders take short positions. In contrast, in the latter situation, when the indicator dips below -100 and then gets back above it, traders go long in anticipation of the bullish trend. The chart above shows United Parcel Service (UPS) with 40-day CCI. A longer timeframe, 40 versus 20, was used to reduce volatility.

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This way, we get a better “feel” for how the indicator performs. As usual, we backtest the CCI indicator on S&P 500 by using the ETF with the ticker code SPY. When changing the settings of the CCI it is important that you test whether your changes are actually improving or worsening the results of your strategy. 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. The percentage of CCI values that fall between +100 and -100 will depend on the number of periods used.

• This means that the likelihood of an early trend reversal grows even more.
• Entry and exit rules on the shorter timeframe can also be adjusted.
• Always a period of high prices is followed by a period of low prices, and so on.
• This can have a significant effect on the behavior of the indicator.
• The CCI reading is used by professionals to compare against expectations.

This brings us to the next important thing that we need to establish for the CCI trading strategy, which is where to place our protective stop loss. The natural ebb and flow https://investmentsanalysis.info/ of the market are given by these short-term pullbacks that we’re going to use to trigger our entry. Waiting for a pullback in price is a more defensive trading approach.

As with the momentum-based oscillators, the difference between the price and the indicator should be well studied for CCI. The divergences between the CCI value and the price action also reflect changes in the trend. + The price is trending up (the next peak is higher than the previous one) but CCI is falling. Due to being an unbound indicator, the CCI can’t guarantee that when it drops below -100 or climbs above +100, it is a fair indication of an oversold or an overbought market.

CCI Trading Strategy Basics

The commodity channel index (CCI) is a technical trading indicator that measures the current price level of a security relative to an average price level over a given period. It is a momentum oscillator that is used to identify extreme conditions in the market. Its readings are relatively high when prices are far above their average and relatively low when prices are far below their average. Extreme values may indicate overbought/oversold conditions in the market. The CCI (Commodity Channel Index) is a technical indicator that measures the current price level of a security relative to an average price level over a given period. It is a momentum oscillator that is used to identify extreme conditions, such as oversold and overbought conditions, in the market.

Second, CCI must cross below +200 to show the indicator falling from overbought levels. This scan reveals stocks that are in an uptrend with oversold CCI turning up. First, stocks must be above their 200-day moving average to be in an overall uptrend. Second, CCI must cross above -200 to show the indicator rising from oversold levels.

Both are technical indicators that spot extreme price behaviors of the market. However, each one has a different calculation method and functionality. The CCI indicator monitors aberrations from the usual trend cycles. It is based on the fluctuation of the asset’s Moving Average value. Conversely, the RSI simply screens the speed and the alterations of the asset’s price movements and defines the overbought and oversold levels. Below follows a chart of the Apple stock that presents the RSI and the CCI indicators.

CCI indicator conclusion

Likewise, securities can continue moving lower after an indicator becomes oversold. CCI measures the difference between a security’s price change and its average price change. High positive readings indicate that prices are well above their average, which is a show of strength.

On the other hand, when it goes below -100 and then moves back above it, traders open buying positions. The idea here is that the pullback marks the bear market’s end and signals que es un broker a potential reverse market movement. Such scenarios are considered a signal of a potential extended move and filter for the current bullish/bearish market direction.

Your actual trading may result in losses as no trading system is guaranteed. Creator Donald Lambert himself recommended using the daily timeframe for analysis. This is natural since in the 80s of the last century there were no convenient modern terminals that broadcast every second online, where you can even set a 1-minute timeframe.

CCI indicator – ending remarks

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. 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.

Due to the calculation differences, they will provide different signals at different times, such as overbought and oversold readings. You can use CCI to adjust the strategy rules to make the strategy more stringent or lenient. For example, when using multiple timeframes, make the strategy more stringent by only taking long positions on the shorter timeframe when the longer-term CCI is above +100.

As with every technical trading indicator out there, the CCI also has its pros and cons. Let’s take a look at the advantages and disadvantages of the indicator. This will help you understand what you should look for when using it and improve your trading strategy.

Lambert’s trading guidelines for the CCI focused on movements above +100 and below -100 to generate buy and sell signals. The Commodity Channel Index​ (CCI) is a momentum-based oscillator used to help determine when an investment vehicle is reaching a condition of being overbought or oversold. Bear in mind that past performance is not an indicator of future performance, so any conclusions traders make should be confirmed by additional data. Donald Lambert, who came up with this indicator, assumed that price fluctuations follow certain intervals. Whenever the price goes beyond these normal intervals, there is a high chance that it will bounce back shortly. If traders choose to open a deal at this moment, it is because they expect the price to potentially get back to the original interval soon.

• The green circles on the two indicators show when each was aligned and we opened a trade.
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• This means a you can, in theory, enter a trade right as a trend is beginning, or exit an existing trade before it moves against you.

When the indicator is rising and the price is falling, it may indicate the weakening of the downtrend. But if the indicator is falling with rising price, the uptrend is losing momentum and a reversal may be likely. Divergence may not be an accurate reversal signal but it should still be considered a warning sign that market conditions may change. CCI is a very well-known and widely-used indicator that has gained level of popularity in no small part of its versatility. Besides overbought/oversold levels, CCI is often used to find reversals as well as divergences.

Best settings for the CCI indicator

The way the Commodity Channel Index’s design makes it easy to use and interpret even by beginners. All you have to do to use the CCI is to adjust the number of periods you want to analyze. When you hear the “Commodity Channel Index” term for the first time, it is natural to think that it is designed to work only in the commodity markets. However, aside from futures, you can also apply it to equities, forex, and a variety of other asset classes. The vital thing to note is that it should be adjusted depending on the traded instrument’s historical characteristics.