In the financial market, traders use various tools to plan a profitable investment strategy and boost their winning rates. Such mechanisms include the RSI, MACD, RVI, and CCI. In this article, we will analyze the importance of the Commodity Channel Index (CCI), an oscillator indicator that is popular among investors due to its reliability and effectiveness.
What is the CCI indicator Indicator?
The Commodity Channel Index, also known as the CCI indicator, is an oscillator tool that was developed by Donald Lambert in 1980. The creation of CCI was related to the need to understand unique patterns and trends in the trading market. The CCI has become widely spread amongst investors since it is a technical analysis method that helps investors to foresee potentially oversold and overbought levels. Moreover, it is also used to monitor the trend of an asset and alert traders about upcoming selling or buying opportunities so they will enter or exit a trade at the right time.
The CCI function is based on the comparison between the current price position and its average value that is measured over a certain period. The result of this difference presents how strong or weak the market is. As a momentum indicator, it fluctuates over and under the zero line and there is no limit on its upward or downward value. However, the values of 100 and -100 are considered to be key levels.
If a very high CCI appears from the calculations, it represents the price level that is way higher than their historic average value. Conversely, if prices are a long way below their average level then the CCI value is correspondingly very low. This way investors understand whether the trend goes stronger or not and if it is the proper time to enter or exit the market.
CCI VS RSI
To understand the trend of the market, investors use popular oscillator tools such as CCI and RSI. Both are technical indicators that spot extreme price behaviors of the market. However, each one has a different calculation method and functionality. The CCI indicator monitors aberrations from the usual trend cycles. It is based on the fluctuation of the asset’s Moving Average value. Conversely, the RSI simply screens the speed and the alterations of the asset’s price movements and defines the overbought and oversold levels. Below follows a chart of the Apple stock that presents the RSI and the CCI indicators.
CCI vs. Stochastic Oscillator
Another type of oscillator that is commonly used by traders is the Stochastic Oscillator. Its functionality is similar to the CCI indicator since they both vary between negative and positive prices. They also assist investors to spot overbought and oversold levels in the market.
Despite their similarities, the CCI is considered to be more effective and reliable since it can display important trading signals at an earlier stage due to its higher sensitivity to price changes. Moreover, the Stochastic Oscillator is often used as a confirmation of the trading signals that are generated by CCI and it helps to estimate potential buy and sell opportunities. Last but not least, it should be underlined that during a strong trend the Stochastic Oscillator may generate false signals and lead investors to small profits or even losses.
Below follows a chart that demonstrates the Stochastic and the CCI indicators of the AirBNB share.
CCI vs. MACD
The MACD is another type of momentum indicator popular in the trading world due to its high accuracy and effectiveness. It is a more complex tool that uses the Moving Average (MA) to find the momentum and trend direction of an asset. The CCI indicator, in contrast, presents the oversold and overbought areas earlier than the MACD. Moreover, it is used to present the deviation from the average price.
Both oscillators are commonly used at the same time for more accurate and efficient trading results. Thus, a potential buy or sell signal can be spotted when the CCI crosses the MA line. Additionally, if the MACD moves over or under the same line, it can be considered a validation of a buying or selling signal generated by the CCI indicator.
Below is presented a chart of the Alcoa share that includes the MACD and CCI indicators.
How CCI indicator works
Before starting your trading experience with the CCI indicator it is important to come to grips with the way this oscillator works. This index is commonly used on price charts combined with any type of MA line so the produced information would be presented more understandable and accurate.
The core element to comprehend the trend of the market is to monitor the value of the CCI line. Thus, when the indicator is higher than +100, it is considered to be a buy signal since the market is beginning to be on an uptrend. Conversely, if the indicator shows values below the -100 it is thought to be the beginning of a strong downtrend, and sell signals are generated. Those values are not the only ones that can be used. Much higher or lower prices, such as -200 or +200, can be applied depending on the volatility of the asset.
It is important to remember that the level of CCI depends on the number of periods that are used between -100 and +100 values. Thus, if the indicator has a high percentage between the limit of -100 and +100, this shows that many periods are used. Conversely, a shorter CCI is a sign of volatility and the percentage between the higher and lower limit will be smaller.
How to Calculate CCI Indicator
The CCI indicator is calculated by following a specific sequence of steps. The core element of the calculations is to first determine the difference between the current price of an asset and the average value of prices within a specific period. Then this result is compared with the average difference over the same period. The last step includes the multiplication of the generated final result and a constant, the majority of values will range between the values of +100 and -100.
Here are the equations used to calculate the CCI indicator:
Where :
- TP stands for Typical Price
- High represents the Highest Price of the period
- Low represents the Lowest Price of the period
- Close is the Closing Price
Next, we calculate the Simple Moving Average (SMA) over the specific period:
Where:
- TPAVG is the initial for the Moving Average of the Typical Price
- TP is the Typical Price of the nth period
- n stands for the total amount of periods
Once having made the calculations above, traders can move to the next step that computes the mean deviation :
Where:
- MD stands for the Mean Deviation
- TPn represents the Typical Price of the nth periods
- TPAVGn is the MA of the Typical Price for the same periods
- n represents the total of intervals
Finally, the complete value of the CCI is calculated from the next formula:
Where:
- CCI stands for Commodity Channel Index
- TPt represents the Typical Price of the period
- TPAVGt is the MA of the Typical Price
- 0.015 is a constant
- MDT stands for the Mean Deviation due to the specific period
The value of 0.015 as a constant was made by Lambert since 70 to 80 percent of the generated values can range in the limits between +100 and -100.
Best Commodity Channel Index Indicator Pairings
In order to achieve the best results, most investors tend to combine various indicators to generate more reliable and efficient information for the price trend. By drawing their information from different perspectives, they are likely to make potentially more successful trading choices. Below are listed the most common combinations of CCI with different indicators.
CCI and Fibonacci Retracement
It is very popular amongst traders to combine the CCI indicator with the Fibonacci Retracement since they are both advanced trading tools. The latter, commonly applied in the crypto market, helps investors to spot the most appropriate buying point. Additionally, the CCI indicator presents the overbought and oversold levels as well as potential price reversals. The most trustful Fibonacci percentages are considered to be 38.2 %, 50.0 %, and 61.8 %.
In the chart above the Fibonacci Retracement is combined with the CCI indicator in the crypto market. This example presents the 2-hour intraday chart of Bitcoin/ TetherUS. It can be seen that on the value of around 38% a bullish rejection occurs while the CCI indicator remains at the oversold zone. This is an extra confirmation for the investors that it is a buying trade. Thus, they could consider a bullish reversal of the asset’s price.
CCI and OBV
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. OBV is based on price volume and movements. The core element is the comparison between the current day’s closing price with the last day’s closing price. Ιf today’s value is lower than the last day’s value, it is added to the OBV. Otherwise, it is deducted from it.
It is important to underline that depending on the price being on a distribution or accumulation phase, the OBV is moving up or down respectively.
In the chart above, you can note that when the price reaches a new low yet the OBV forms a new high and generates a signal of an upcoming divergence. From the part of the chart colored by the green square, it’s possible to see that a bullish candlestick appears yet the CCI remains in the oversold zone. Thus, the price goes higher creating a new bullish trend.
CCI and Parabolic SAR
Parabolic SAR (PSAR) is an efficient lagging indicator that follows the price trend and is presented on the chart with dots over or under the price line. It also plays the role of support and resistance level. The key element of its functionality is that it helps traders to find the latest price reversal zones.
When the PSAR and the CCI are combined, they form an efficient tool for day trading. This type of trading strategy is enforced by adding the dynamic 20 EMA indicator. Thus, a price movement over the 20 EMA presents a bullish market and when it moves below the 20 EMA line it indicates a bearish sign.
On the chart that is demonstrated above the price of the asset is moving up where both the price and the PSAR are above the 20 EMA line. While the asset’s price moves to lower levels a bullish reversal in the PSAR line is monitored at the same time. Additionally, the CCI remains over the +100 value, indicating an existing strong trend. It should be mentioned that the bullish trend will remain as long as the asset’s price stays over the latest swing low.
How to Trade with the CCI Indicator
It is strongly advised before starting trading with the CCI indicator to spot the zones where the market is oversold or overbought. Thus, traders can be prepared to open a buy or a sell position when the price is low or high respectively. Below are the most popular CCI strategies that are used by investors.
CCI Trend Continuation Trade
In this type of strategy, traders need to constantly monitor the levels of the price so that they could spot the overbought or oversold periods. During an overbought zone, the possibility of a price decline is very high. Conversely, due to an oversold market, the price is more likely to reverse and go higher.
This information is crucial since traders can understand when to go long or short. If the CCI is over the 100 value it may be more profitable for them to take long positions. Additionally, if an extremely bullish position appears they should exit their buying positions. A situation like this may be seen if the CCI exceeds 200.
CCI Range Trading
In a market that fluctuates between the levels of support and resistance, the CCI indicator helps traders to mark the top and the bottom values so they will make the correct investment choices. When the CCI exceeds the value of 100 or falls below -100, it is considered that the market enters the overbought or oversold levels respectively.
Below is a chart that presents the levels where the market enters the overbought and oversold zones, from which the traders may benefit with good profits.
CCI Divergence Trading
While studying the chart of an asset, investors may notice that the price movement can be in the opposite direction from the indicator’s movement. This can be interpreted as a strong sign of an upcoming trend reversal. It is a great chance for investors to open buy or sell positions using an efficient trading tool called the CCI divergence.
Below is demonstrated the Apple’s share chart which presents that while the price makes a new lower low, the CCI indicator makes a higher low. Thus, even though the price shows a bearish pressure, the CCI indicates a strong trend reversal.
What Are The Advantages of Using The CCI indicator?
The CCI indicator offers various benefits to its traders. Below follows a list of the advantages of CCI :
- It helps investors to foresee possible buy or sell opportunities.
- It defines the overbought and oversold zones where traders can benefit from their decisions to exit or enter their position.
- Investors that use multiple time frames can make more efficient decisions by taking long positions on shorter time frames when the CCI indicator is more than +100.
- The CCI indicator can help traders to understand if a falling price may turn into a promising uptrend. Thus, the price line may be falling yet the CCI at the same time may be rising.
- The CCI indicator can be combined with various oscillator tools that can offer more accurate and reliable trading information.
- It can also help investors to adjust their exit and entry points and benefit from the sudden rally of the price over or below the CCI line.
What Are The Limitations of Using The CCI indicator?
As with any indicator, the use of CCI comes also with its drawbacks. Below follows a list of some points that investors should be aware of when using the CCI:
- Past CCI overbought and oversold signals don’t have a direct influence on the future asset price.
- It is a lagging indicator since it takes into consideration the past values and this may generate poor signals.
- It is not following the speed movement of the price and a change from the value of 100 to -100 may come too late. Thus, the trend may have already been reversed and the price has started to correct already.
- Such whipsaws, where the CCI doesn’t follow the price may lead traders to poor profits or even losses.
Conclusion
The CCI indicator is an oscillator tool that is very popular amongst investors. 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. However, it also has its limitations. It cannot easily spot the highest and lowest points of a trend. In addition, to mitigate such drawbacks it is advised to combine the CCI indicator with other analytical tools for better results.
