How to Trade Using the Commodity Channel Index CCI

Such incidents are called whipsaws; a signal is provided by the indicator but the price doesn’t follow through after that signal and money is lost on the trade. Therefore, the indicator is best used in conjunction with price analysis and other forms of technical analysis or indicators to help confirm or reject CCI signals. Keep in mind that the Commodity Channel Index is not bound by any specific values. So traders need to take that into account when learning how to read the CCI indicator and making trading decisions based on its data. As no one indicator can guarantee 100% accuracy, it may also be a good idea to confirm your analysis using other technical tools. The figures above use a weekly long-term and daily short-term chart.

It gained its name because it was originally used to analyze commodities. While the CCI will oscillate above and below the zero line, it is more of a momentum indicator, because there is no upward or downward limit on its value. The default period for the CCI indicator is 14 periods, just as the slow stochastics and RSI. Remember, if you choose to use a shorter setting, the number of signals and sensitivity of the indicator will increase. This scan reveals stocks that are in a downtrend with overbought CCI turning down. First, stocks must be below their 200-day moving average to be in an overall downtrend.

The CCI indicator can inform the trader about various market developments. The list includes overbought and oversold price levels, divergences, and emerging trends. It also provides insights into the price momentum and its strength, making it one of the most complete technical trading indicators. Divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and CCI forms a higher low, which shows less downside momentum.

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Consumer confidence measures how optimistic (or pessimistic) consumers are about the state of the economy. Put simply, consumer confidence gives economists a window into how people are feeling about the economy. This is generally expressed in how they save and how they spend their money. The more they spend, the more confident they are about the direction and state of the economy. If people save more, though, it generally means they aren’t feeling as optimistic. With the exit, you may want to allow the price to rally above +100 and then dip below zero ​(instead of +100) before closing the long position.

They will also give different signals in overbought or oversold due to differences in the way they are calculated. As in the RSI example, using Stochastic in comparison with CCI will allow you to make more accurate investment decisions. This emerging value also offers you a clue to detect https://investmentsanalysis.info/ new trends. It is a technical indicator that measures the difference between the current price and the historical average price. When the CCI is above zero, the price is above the historical average. Conversely, when the CCI value is below zero, the price date is below the average.

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Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can be successfully applied to indices, ETFs, stocks and other securities. In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average, but is relatively low when prices are far below their average. In this manner, CCI can be used to identify overbought and oversold levels. To understand the trend of the market, investors use popular oscillator tools such as CCI and RSI.

Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! At the same time, the lines of the stochastic RSI are also in the overbought area. The second signal comes when the two SRSI lines cross downwards as well. On the other hand, if you are shorting the stock, you should look for a top near your entry price.

So, you have to add another indicator to confirm overbought/oversold levels. In the following image, the price crosses the +100 level, indicating overbought conditions. 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 commodity channel index (CCI) is an oscillator indicator that helps show when an asset has been overbought or oversold.

For example, when the CCI surpasses +100 and then gets back below it, traders open sell positions. In that case, the strong uptrend, indicated by the line’s beating the +100 mark, ends, and the trader expects a reverse market movement. If you are a fan of the CCI indicator, then you might want to take a look at the free CCI EA that I have developed. It can automatically analyse charts for buy and sell signals based on various CCI trading strategies. However, it is strongly recommended to use other indicators as filters to increase odds of success.

What Are The Advantages of Using The CCI indicator?

Therefore, traders look at past readings on the indicator to get a sense of where the price reversed. Another commodity, meanwhile, 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. The Commodity Channel Index indicator is a great technical analysis tool to complement your strategy. If used correctly and in combination with other indicators, it can help form a robust trading system.

Lambert decided to set the constant to 0.015 to ensure that 70% to 80% of all CCI values will fall between -100 to +100. The exact number that falls within the given range depends on how many periods you’re using. The algorithm is calculated on the basis of classical market laws. Always a period of high prices is followed by a period of low prices, and so on. If you know this, then you can gain an edge when trying to anticipate future price movements.

As of Aug. 2023, the CCI stood at 106.1, which is down from 114 in July 2023. A current CCI above 100 means consumers are more optimistic than the benchmark CCI of 100 set in 1985. Conversely, if the current CCI falls below 100, it would mean consumers were more pessimistic than in 1985.

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However, you can also buy right away when the CCI crosses above +100. In this case, you need to make sure enough time has elapsed between now and the last time the CCI passed above +100. Once the CCI crosses above the +200 level we take whatever the market has given to us and close the trade. Now, day trading is all about getting in and out of the market fairly quickly.

• This image above shows a CCI with the setting of 4, which is much lower than the standard setting of 14.
• The real story about the CCI is not the indicator, but the community that has been developed around the indicator.
• Conversely, a bullish divergence can be confirmed with a break above zero in CCI or a resistance break on the price chart.
• Based on the simulations we decided to backtest the CCI indicator by using a 9-day lookback period and a buy threshold of -90.

All readings oscillate between zero and 100, with a midpoint of 50, allowing for easy readings about potential overbought (above 70) and oversold (below 30) levels. The figure above shows three buy signals on the daily chart and two sell signals. No short trades are initiated, since the CCI on the long-term chart shows an uptrend. When using a daily chart as the shorter timeframe, traders often buy when the CCI dips below -100 and then rallies back above -100. It would then be prudent to exit the trade once the CCI moves above +100 and then drops back below +100.

What Every Trader Ought To Know About CCI Indicator

While this could mean holding through some small pullbacks, it may increase profits during a very strong trend. When the CCI is above +100, this means the price is well above the average price as measured by the indicator. When the indicator is below -100, the que es trading forex price is well below the average price. A period refers to the number of price bars the indicator will include in its calculation. The price bars can be one-minute, five-minute, daily, weekly, monthly, or any timeframe you have accessible on your charts.

Donald Robert published the commodity channel index in the Commodities magazine (now Futures) in 1980. Originally, the CCI was used to trade only commodities, but now, it is used to trade in any market. The indicator has been in use for more than three decades now and has become more popular with the emergence of automated trading systems. The trading and investing signals are provided for education purposes and if you use them with real money, you do so at your own risk.

Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of this entry method. Also, read trading discipline which is also a most important skill for successful trading. This means that we can use the crossing of the zero line to gauge a shift in the market sentiment. The CCI indicator was created by Donald Lambert and was initially used to identify cycles in the commodity market. However, it tends to perform the same in the stock market or the Forex currency market and even the cryptocurrency market for that matter.