CCI

CCI (Commodity Channel Index)

1. Overview

The Commodity Channel Index (CCI), developed by Donald Lambert in the 1980s, is a technical indicator initially designed for commodities but now widely applied in stock and forex markets. CCI measures how far price deviates from its average, helping identify overbought and oversold conditions. Typically, a high CCI value signals overbought conditions, while a low CCI value signals oversold conditions.

2. How CCI is Calculated

The CCI is calculated using the following formula:

CCI = (TP − MA) ÷ (0.015 × MD)

• TP (Typical Price): (High + Low + Close) ÷ 3
• MA (Moving Average): Moving average of TP over a specified period
• MD (Mean Deviation): Average of the differences between TP and MA

This calculation quantifies how far prices deviate from the average. Generally, values above +100 indicate overbought conditions, while values below -100 indicate oversold conditions.

3. How to Use CCI

・Identify Overbought/Oversold Conditions

When CCI rises above +100, the market is considered overbought, signaling potential reversal. Conversely, when CCI falls below -100, the market is considered oversold, suggesting a potential upward move.

・Assess Trend Strength

CCI reflects how strongly prices move above or below their moving average. Sustained readings above +100 may indicate a strong uptrend.

・Check for Divergence

Divergence between CCI and price (e.g., price makes new highs but CCI does not) often signals weakening momentum and potential trend reversal.

4. Pros and Cons of CCI

Pros:

• Simple and intuitive: Clearly indicates overbought/oversold states and can be combined with other indicators.
• Versatile: Useful across commodities, equities, and forex markets.
• Divergence signals: Helps traders spot early signs of reversals.

Cons:

• False signals: In strong trends, CCI may remain in overbought/oversold zones for extended periods, making reversal signals unreliable on their own.
• Sensitivity to period settings: Performance depends on the chosen time frame. While 14 periods is common, adjustments may be needed for specific markets.

5. Practical Examples

• Buy entry in an uptrend:
  When CCI exceeds +100, price corrects temporarily, and then CCI rises above +100 again, it can confirm a strong uptrend and provide a buy signal.
• Sell entry in a downtrend:
  When CCI falls below -100, price rebounds, and then CCI drops below -100 again, it may confirm a strong downtrend and provide a sell signal.

6. Summary

The Commodity Channel Index (CCI) is a valuable tool for identifying overbought and oversold conditions and gauging market momentum. It is especially useful for spotting trend strength and potential reversal points. However, because CCI can generate false signals, it is best used in combination with other technical indicators for higher accuracy.

By effectively incorporating CCI into trading, traders can improve decision-making and enhance success rates. Using divergence and trend-following strategies with CCI can further refine trade setups.