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What Is The CCI - Commodity Channel
Hello traders 📈
Today I want to share with you a lesson in the CCI or Commodity Channel Index Indicator.
Developed by Donald Lambert, 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.
This technical indicator is also used to assess price trend direction and strength. This information allows traders to determine if they want to enter or exit a trade, refrain from taking a trade, or add to an existing position.
What Does the Commodity Channel Index Tell You?
The CCI is primarily used for spotting new trends, watching for overbought and oversold levels, and spotting weakness in trends when the indicator diverges with price.
When the CCI moves from negative or near-zero territory to above 100, that may indicate the price is starting a new uptrend. Once this occurs, traders can watch for a pullback in price followed by a rally in both price and the CCI to signal a buying opportunity.
The same concept applies to an emerging downtrend. When the indicator goes from positive or near-zero readings to below -100, then a downtrend may be starting. This is a signal to get out of longs or to start watching for shorting opportunities.
Overbought and oversold levels are not fixed since the indicator is unbound. Therefore, traders look to past readings on the indicator to get a sense of where the price reversed. For one stock, it may tend to reverse near +200 and -150. Another commodity may tend to reverse near +325 and -350. Zoom out on the chart to see lots of price reversal points, and the CCI readings at those times.
There are also divergences. This is when the price is moving one way but the indicator is moving another. If the price is rising and the CCI is falling, this can indicate a weakness in the trend. While divergence is a poor trade signal, since it can last a long time and doesn't always result in a price reversal, it can be good for at least warning the trader that there is the possibility of a reversal. This way they can tighten stop loss levels or hold off on taking new trades in the price trend direction.
Limitations of Using the Commodity Channel Index
While often used to spot overbought and oversold conditions, the CCI is highly subjective in this regard. The indicator is unbound and therefore, prior overbought and oversold levels may have little impact in the future.
The indicator is also lagging, which means at times it will provide poor signals. A rally to 100 or -100 to signal a new trend may come too late, as the price has had its run and is starting to correct already. When this happens with indicators you can potentially get a lot of false indications or fake outs, so it is always recommended to use any indicator in conjuction with another mode of technical analysis such as price action, or another indicator... Keep in mind though that since this is a momentum based indicator, another momentum based indicator is redundant. I personally would always recommend the Traders Dynamic Index as a base indicator, and then adding in the CCI for example as extra confirmation of market analysis.
You can add this interesting indicator to your charts for free as a built in on tradingview.com
KEY TAKEAWAYS
I hope you found this review of the Commodity Channel Index useful, Please subscribe to my channel for more indicator reviews and market analysis!
Today I want to share with you a lesson in the CCI or Commodity Channel Index Indicator.
Developed by Donald Lambert, 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.
This technical indicator is also used to assess price trend direction and strength. This information allows traders to determine if they want to enter or exit a trade, refrain from taking a trade, or add to an existing position.
What Does the Commodity Channel Index Tell You?
The CCI is primarily used for spotting new trends, watching for overbought and oversold levels, and spotting weakness in trends when the indicator diverges with price.
When the CCI moves from negative or near-zero territory to above 100, that may indicate the price is starting a new uptrend. Once this occurs, traders can watch for a pullback in price followed by a rally in both price and the CCI to signal a buying opportunity.
The same concept applies to an emerging downtrend. When the indicator goes from positive or near-zero readings to below -100, then a downtrend may be starting. This is a signal to get out of longs or to start watching for shorting opportunities.
Overbought and oversold levels are not fixed since the indicator is unbound. Therefore, traders look to past readings on the indicator to get a sense of where the price reversed. For one stock, it may tend to reverse near +200 and -150. Another commodity may tend to reverse near +325 and -350. Zoom out on the chart to see lots of price reversal points, and the CCI readings at those times.
There are also divergences. This is when the price is moving one way but the indicator is moving another. If the price is rising and the CCI is falling, this can indicate a weakness in the trend. While divergence is a poor trade signal, since it can last a long time and doesn't always result in a price reversal, it can be good for at least warning the trader that there is the possibility of a reversal. This way they can tighten stop loss levels or hold off on taking new trades in the price trend direction.
Limitations of Using the Commodity Channel Index
While often used to spot overbought and oversold conditions, the CCI is highly subjective in this regard. The indicator is unbound and therefore, prior overbought and oversold levels may have little impact in the future.
The indicator is also lagging, which means at times it will provide poor signals. A rally to 100 or -100 to signal a new trend may come too late, as the price has had its run and is starting to correct already. When this happens with indicators you can potentially get a lot of false indications or fake outs, so it is always recommended to use any indicator in conjuction with another mode of technical analysis such as price action, or another indicator... Keep in mind though that since this is a momentum based indicator, another momentum based indicator is redundant. I personally would always recommend the Traders Dynamic Index as a base indicator, and then adding in the CCI for example as extra confirmation of market analysis.
You can add this interesting indicator to your charts for free as a built in on tradingview.com
KEY TAKEAWAYS
- The Commodity Channel Index (CCI) is a technical indicator that measures the difference between the current price and the historical average price.
When the CCI is above zero it indicates the price is above the historic average. When CCI is below zero, the price is below the historic average.
CCI is an unbounded oscillator, meaning it can go higher or lower indefinitely. For this reason, overbought and oversold levels are typically determined for each individual asset by looking at historical extreme CCI levels where the price reversed from.
I hope you found this review of the Commodity Channel Index useful, Please subscribe to my channel for more indicator reviews and market analysis!
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