Commodity Channel Index CCI

When CCI moves below −100, the security is considered to be in a strong downtrend and a sell signal is given. Because about 70 to 80 percent of the CCI values are between +100 and −100, a buy or sell signal will be in force only 20 to 30 percent of the time. When the CCI moves above +100, a security is considered to be entering into a strong uptrend and a buy signal is given. When the CCI moves below −100, the security is considered to be in a strong downtrend and a sell signal is given.

Second, securities can continue moving higher after an indicator becomes overbought. Likewise, securities can continue moving lower after an https://day-trading.info/ indicator becomes oversold. Some traders may have considered the stock overbought and the reward-to-risk ratio unfavorable at these levels.

Each order must be protected with a stop loss (set on a local extremum or at a key price level). The Commodity Channel Index (CCI) indicator mainly measures the current price level relative to an average price level over a particular period of time. CCI and stochastics are momentum oscillators, and both tell overbought/oversold levels. If the CCI signal line goes above or below this https://forex-world.net/ level, it indicates overbought and oversold levels. By requiring an exit on a move back below +100 or a move back above -100, Lambert’s original trading strategy produced lots of relatively short signals. This CCI Correction strategy offers a tweak to Lambert’s original strategy, but maintains his general trading guidelines, which rely on a surge above +100 or plunge below -100.

A good trading tip on how to use the CCI indicator is in conjunction with chart analysis, which is the central theme of this CCI trading strategy PDF. In order to achieve the best results, most investors tend to combine various indicators to generate more reliable and efficient information for the price trend. By drawing their information from different perspectives, they are likely to make potentially more successful trading choices. Below are listed the most common combinations of CCI with different indicators. Analysis to identify long-term trends is best done on weekly and monthly charts. This allows us to assume that the breakout of the levels +100; -100 will indicate a long-term trend.

CCI Divergence Trading

Readings above +100 imply an overbought condition, while readings below −100 imply an oversold condition. As with other overbought/oversold indicators, this means that there is a large probability that the price will correct to more representative levels. For scaling purposes, Lambert set the constant at 0.015 to ensure that approximately 70 to 80 percent of CCI values would fall between −100 and +100. The percentage of CCI values that fall between +100 and −100 will depend on the number of periods used.

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 https://forexbox.info/ confirm this divergence a few days later. Second, a bullish divergence formed in early July as the stock moved to a lower low, but CCI formed a higher low. This divergence was confirmed with a CCI break into positive territory. Also notice that UPS filled the late June gap with a surge in early July.

Calculations

Conversely, due to an oversold market, the price is more likely to reverse and go higher. In the chart above the Fibonacci Retracement is combined with the CCI indicator in the crypto market. This example presents the 2-hour intraday chart of Bitcoin/ TetherUS. It can be seen that on the value of around 38% a bullish rejection occurs while the CCI indicator remains at the oversold zone.

Trading with multiple timeframes provides more buy or sell signals for active traders. Traders often use the CCI on the longer-term chart to establish the dominant trend and on the shorter-term chart to isolate pullbacks and generate trade signals. Let us add one more indicator – a simple moving average with period 100– to the CCI system in order to improve signals quality and, accordingly, trading efficiency. It is better to use the CCI + MA strategy for short-term trading, opening orders when prices retrace from MA. The moving average will be used as a support/resistance line in this case. M15 is the optimal time frame for trading, but let us also add scalping at M5.

How this indicator works

A reading above +100 can indicate that an asset has been overbought, suggesting the price may start moving down. A reading below -100 suggests that an asset has been oversold and that the price may start moving up. The CCI indicator is usually presented on charts using a moving average type line that smooths out the data being analysed.

• The mean deviation looks at the average deviation over the entire period.
• Whereas the numerator in the CCI indicator calculation looks at today’s deviation from the SMA.
• Explicit divergences and convergences are formed much less frequently than just entries into overbought and oversold zones; therefore, they are more reliable as a signal.

The red horizontal lines on the chart show where we placed our stop-loss orders for each trade. After the CCI line goes in the overbought area, it then breaks downwards creating the first signal. The rules for taking profits with this strategy are even simpler than the stop-loss rules. The upper indicator is the commodity channel index indicator and the lower indicator is the stochastic RSI. It is important to underline that depending on the price being on a distribution or accumulation phase, the OBV is moving up or down respectively.

CCI indicator

Traders have now begun to not only use the CCI to trade commodities but also for stocks as well. A rule of thumb for the commodity channel index indicator is that oversold is – 100 and overbought +100. While traders will look for divergences in the CCI and the price trend, trend line breaks of the CCI are also very popular. The real story about the CCI is not the indicator, but the community that has been developed around the indicator. An independent trader Ken Wood has created the “CCI University” that teaches detailed methods on how to trade profitably with the CCI.

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. A bearish divergence can be confirmed with a break below zero in CCI or a support break on the price chart. Conversely, a bullish divergence can be confirmed with a break above zero in CCI or a resistance break on the price chart. Lambert created the indicator for working in commodity markets to identify cyclical reversals. CCI compares current prices with the average over a specified time interval.

Volatile securities are likely to require greater extremes than docile securities. Trend changes can be identified when CCI crosses a specific threshold between zero and 100. Regardless of how CCI is used, chartists should use CCI in conjunction with other indicators or price analysis. Another momentum oscillator would be redundant, but On Balance Volume (OBV) or the Accumulation Distribution Line can add value to CCI signals.

Much higher or lower prices, such as -200 or +200, can be applied depending on the volatility of the asset. As a leading indicator, chartists can look for overbought or oversold conditions that may foreshadow a mean reversion. Similarly, bullish and bearish divergences can be used to detect early momentum shifts and anticipate trend reversals.

How Traders Use CCI (Commodity Channel Index) to Trade Stock Trends

Murphy covers the pros and cons as well as some examples specific to the Commodity Channel Index. If you want to receive an invitation to our live webinars, trading ideas, trading strategy, and high-quality forex articles, sign up for our Newsletter. Conversely, a rapid fall of the indicator after level 100 reached indicates a fall in the trend. The divergence of the price shown by the CCI indicator and the one shown on the chart is Divergence. It shows the sequence of price lows with the consecutive highs displayed on the chart. If the last low is lower than the previous one in a downtrend, and the last bottom on the indicator is higher than the previous one, a buy trade can be opened.

Traders often combine oscillating indicators, like CCI, with trending indicators, like a moving average. The CCI indicator shows when the current price level is far above/below the moving average. Most of the time the indicator line oscillates between levels +100 and -100. When the line leaves this range, you get a signal about asset being overbought or oversold.