CCI Indicator Explained in Detail So You Can Trade Smarter

No wonder then that most beginners complain that indicators such as the commodity channel index do not work as expected. Although the commodity channel index indicator was developed to analyze the commodity markets, it is now widely used across multiple assets; from stocks and ETF’s to futures and spot forex. Another possible combination can be done between the CCI and on-balance volume (OBV). The latter is an indicator that monitors the accumulation and distribution periods of a trend.

CCI Indicator Trading Strategies

So, if you’re looking to tinker with the settings for your CCI indicator, you might as well adjust the Upper and Lower Levels rather than muddying the waters by toying with the constant too. If we look at it deeper we know that it’s the high and low price that really pull the typical price in any one direction. Though each price (high, low, close) is weighted equally, the close will always fall within the high or low.

Identify Overbought and Oversold Price Levels

• The upper indicator is the commodity channel index indicator and the lower indicator is the stochastic RSI.
• In other words, using the cci as a trend indicator, you can time your entries within a trend.
• Even though the CCI indicator is an excellent trading tool, it certainly has some limitations.
• If the price makes a new high/low and the CCI moves oppositely, it suggests a trend reversal.

Traders can incorporate volume indicators to confirm the strength of trends signaled by the CCI. Also, before applying the CCI in live trading, the strategy should be backtested on historical data to analyze past performance. Utilizing the CCCI across multiple timeframes can offer traders a more nuanced understand of market conditions. Cci indicator When traders align their transactions with the broader market trend, the likelihood of success could be increased. Yes, the Commodity Channel Index is one of the most reliable and accurate technical analysis indicators. Based on our thorough backtesting of the S&P 500 stocks across 20 years, CCI outperformed the market by 580%.

What Does the CCI Indicator Measure?

The 5-period simple moving average of the typical price will, of course, be $24.00. Next, you calculate a simple moving average of the typical price for the number of periods specified. The CCI is categorized as a momentum oscillator, which means that CCI is used to identify overbought and oversold levels. You can study the overbought and oversold levels of different commodities to take a position on the spot (cash) price, futures or options. Like any other momentum oscillator, the CCI is not designed to be used as a standalone tool. It may be more effective to complement this indicator with another technical tool, such as a price channel.

In this guide, we are going to cover everything you need to know about the https://investmentsanalysis.info/, including how to use the indicator and implement the CCI trading strategy. Closing prices are usually used with other oscillators such as the Relative Strength Index (RSI) and this is where the CCI indicator differs. But, when momentum slows (as shown by the CCI value above +100 or below -100), you can expect price to revert to the mean. Viktor has an MSc in Financial Markets and years of investing experience. His preferred instruments are ETFs but also maintains a portfolio of cryptocurrencies.

In the former case, it will help you spot overbought and oversold signals. Meanwhile, in the latter case, it will indicate the potential emergence of uptrends or downtrends. Such scenarios are considered a signal of a potential extended move and filter for the current bullish/bearish market direction. When the CCI ranges over the +100 mark, it is considered favorable for the bulls, while when moving below the -100 mark, it is viewed as a bear signal.

All price trading ranges are flexible, but the CCI is designed to take advantage of prices that have exceeded normal movements and are likely to snap back. Traders might look to sell their holdings or covered calls when the CCI is very high or make an additional purchase when the CCI is very low. 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.

Instead, when you learn to recognize a trending market, you can use the CCI indicator to find the right entry-level to join an existing trend. However, it is important to point out that the success in forex trading is only partly due to the trading system you are using. It is essential that other factors are also considered, including careful attention to your risk management and analyzing the underlying fundamentals that govern the price. As described in this article, the CCI indicator is a powerful tool that traders can use as part of their technical approach.

The position should be closed when the CCI moves back below +100. When the CCI moves below −100, the security is considered to be in a strong downtrend and a sell signal is given. The position should be closed when the CCI moves back above −100.

It can be applied in the trading of all assets such as cryptos, commodities, shares, etc. Moreover, it is an efficient technical tool that helps traders to find the overbought and oversold areas on the trading chart. It can also be used to spot the divergences where the current market trend may lose strength. In addition, to mitigate such drawbacks it is advised to combine the CCI indicator with other analytical tools for better results.

The idea of using the MA is to have it serve as a support/resistance line. No matter how you use the indicator, though, the essential thing is to make sure you aren’t applying uniform rules blindly without considering the CCI’s specifics. Alternatively, to avoid adopting the same approach as with other indicators. On the chart, the indicator is plotted as a line within a box, fluctuating between -100 and +100.