Commodity Channel Index (CCI) was introduced by technical analyst Donald Lambert, who initially published the indicator in Commodities magazine in 1980. (now known as Futures).
Even though the name suggests this, CCI indicator trading is not exclusive to commodities. Traders have modified the CCI from its original function of identifying changes in the long-term trend to be used in all markets and time periods.
Multiple-period trading provides active traders with extra buy and sell signals. In longer-term charts, traders typically apply the CCI to discern the prevalent trend. They spot pullbacks and generate trading signals on shorter-term charts.
There are issues with the strategies and indicators, and altering the strategy criterion and the time of the indicator may enhance performance. Although all systems are prone to losing trades, implementing a stop-loss technique can help minimize risk, and testing the CCI strategy for profitability on your market and time period is a valuable preliminary step prior to initiating trades.
The CCI compares the present price to the average price over a given period. The indicator moves above and below zero, entering positive and negative area respectively. While the majority of values fall between the range of -100 and +100 (about 75%), approximately 25% of values fall outside this range, indicating significant price movement weakness or strength.
Since the preceding chart is a monthly chart, each new CCI estimate is based on the thirty most recent months. CCIs with periods of 20 and 40 are also prevalent.
A period is the number of price bars that will be included in the indicator’s calculation. The price bars on your charts might be one-minute, five-minute, daily, weekly, monthly, or any other available time frame.
The longer the selected time (the greater the number of bars in the computation), the less frequently the indicator will deviate from -100 or +100. Short-term traders prefer a shorter time (fewer price bars in the calculation) since it generates more signals, whereas long-term traders and investors like a longer period, such as 30 or 40. Long-term traders should utilize a daily or weekly chart, while short-term traders can apply the signal to an hourly or even a one-minute chart.
Ways to Make Use of CCI
As previously stated, the CCI gauges the difference between an asset’s current price and its average change. A high number indicates that the price is above its average, while a low number indicates that the price is below its average.
The CCI can therefore be used to identify overbought and oversold levels. On the majority of trading platforms, such as MT4, the default period is 14. Moreover, the CCI has three lines. They are -100, 100, and 0 respectively.
If you examine any chart, you will notice that the price tends to recover when the CCI falls below -100. Once reaching +100, it begins to decline. Yet, there may also be a large number of misleading signals. This indicates that the CCI should never be used alone. Combining it with additional oscillators, volumes, and trend indicators is always advised. This will aid in decreasing the risk of a false signal.
How to Set a CCI Indicator
To use the CCI indicator, you merely need to alter its duration or length. Most trading systems set the length of the indicator to 20 by default. Therefore, it is recommended that you try various time periods on a demo account.
For instance, if you are a day trader, you might consider using a CCI of 10 or 8. Likewise, if you are a trader with a long-term horizon, you can choose a lengthier duration.
CCI vs RSI
Both CCI and RSI are oscillators that can be used to determine overbought and oversold levels, as well as divergences. Yet, the latter is the most popular. The Relative Strength Index (RSI) gauges the rate and change of market price movements.
Similar to the CCI, it spans from 0 to 100, with moves above 70 indicating overbought conditions and those below 30 indicating oversold conditions. The graph below displays a 20-day CCI and a 20-day RSI.
The Commodity Channel Index (CCI) is a prominent market oscillator. Any assets, including stocks, currencies, and exchange-traded bonds, can be traded using this index. We recommend spending a considerable amount of time in a demo account and simulating various use cases in order to use it effectively. After all, the more you practice, the better decisions you will make while trading.