- Type of Indicator: Momentum
- Creator: Donald Lambert
- When Created: 1980s
- First Mentioned In: Commodity Channel Index: Tools for Trading Cyclical Trends
What Is The Commodity Channel Index (CCI)?
The Commodity Channel Index (CCI) is a technical analysis tool that is used to measure the momentum of an asset. It is a momentum oscillator that is used to identify potential overbought and oversold conditions.
How Do You Read The CCI?
The CCI provides traders with information about the momentum of a security. The tool can be used to identify potential overbought and oversold conditions, as well as potential trend reversals.
How Does The CCI Work?
The Commodity Channel Index works by measuring the difference between the typical price and the SMA of the typical price over a specific time period, and dividing it by a multiple of the mean absolute deviation of the typical price over the same time period.
When the CCI is above a certain threshold, it may indicate that the security is overbought. When it is below the threshold, it may indicate that the security is oversold.
How Is The Commodity Channel Index Calculated?
The CCI is calculated by taking the difference between the typical price (the average of the high, low, and close prices) and the simple moving average (SMA) of the typical price over a specific time period, and dividing it by a multiple of the mean absolute deviation of the typical price over the same time period.
The resulting value is then multiplied by a constant factor to normalize the values.
How Do You Use The Commodity Channel Index?
“Overbought and Oversold Conditions: Traders can use the CCI to identify potential overbought and oversold conditions. When the CCI is above a certain threshold, it indicates that the asset is overbought and a potential sell signal. When it is below the threshold, it may indicate that the asset is oversold and a potential buy signal.
Trend Reversals: Traders can also use the CCI to identify potential trend reversals. For example, a bullish divergence between the CCI and the price may indicate a potential trend reversal to the upside, while a bearish divergence may indicate a potential trend reversal to the downside.
Divergence: Traders can also use the CCI to identify potential divergence between the price and the indicator. For example, if the price is making higher highs while the CCI is making lower highs, it may indicate a potential trend reversal.”
Additional Trading & Risk Management Tips
Adjust the time period for the CCI to suit your specific trading style and the market you are analyzing. Shorter periods are more sensitive to price movements. In contrast, longer periods are less sensitive and may be more useful for identifying longer-term trends.
Be aware that the CCI is a lagging indicator. This means it reflects past price movements and may not accurately predict future price movements. Therefore, use it in conjunction with other technical analysis tools to make more informed trading decisions.
Use proper risk management techniques to protect your investments, and always consider other factors in addition to the CCI when making trading decisions.
Monitor the position of the CCI relative to the threshold for potential buy and sell signals. Adjust your trading strategy accordingly.
The CCI can be used on different timeframes, such as daily, weekly, or monthly charts, depending on the trader’s preferencee.
It is important to note that the CCI is a momentum indicator and may not work well in a sideways or ranging market. Traders should also consider other technical indicators or chart patterns to confirm potential trading signals.
Traders should also monitor the slope of the CCI to identify potential trend changes. When the CCI is trending upwards, it may indicate a bullish trend. A downwards trend may indicate a bearish trend.
Finally, it is important to backtest the CCI on historical data to understand its strengths and weaknesses and to develop a solid trading strategy. Practice using the Commodity Channel Index using a TradingView account to backtest performance.