The CCI differs from bounded oscillators like RSI because it has no fixed upper or lower limits. While most readings fall between +100 and -100, extreme market conditions can push the indicator well beyond these levels, providing valuable insights into market strength. Yes, the Commodity Channel Index works very well using setting 50 on daily charts, which is optimal. This setup is tested to have a 53% success rate on DJ30 stocks and a 580% outperformance on S&P 500 stocks. The Commodity Channel Index can be combined with other technical indicators to form a more profitable trading strategy.
Benefits of Using CCI Indicator
When the CCI moves below −100, the security is considered to be in a strong downtrend and a sell signal is given. As such, they typically search for minor trends in the market and use the CCI to identify a trend in the market rather than a reversal. To do so, they buy the asset when it rises above +100 and sell when it falls below -100. It is relatively easy to interpret, appears as a sub-chart, and can be used as a reliable extra indicator to find trading signals. Like all indicators, it provides predictions or signals and should be used accordingly.
So, let’s move on to the next step and learn how to trade financial instruments using the CCI indicator. The Commodity Channel Index and the Relative Strength Index are both momentum oscillators that hover in positive and negative ranges. 70-80% of the CCI values fall within the +1—to -100 range because of the 0.015 constant. The CCI indicator hovers around zero level moving into positive and negative zones. The best way to succeed is to use a CCI-50 on a daily chart for higher reliability.
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It is also very flexible in terms of the settings and parameters a trader can choose. However, as seen in the chart, when the first signal appears, the price trend pauses before it continues upwards. Therefore, many traders use this technique to find trading opportunities. As you can see in the image above, the CCI indicator indeed, most of the time, stays inside a range between -100 to +100.
Here are 3 of the most common mistakes traders make while using CCI. The CCI indicator is an effective technical tool but it is also important to understand that no technical indicator guarantees successful trading outcomes. Applying effective risk management techniques and practicing sound trading discipline are crucial factors behind trading success.
Real CCI Trade Example: GBP/USD Analysis
In addition, the simple moving average indicator is used as another confluence trading tool to confirm the signal. The Commodity channel index (CCI) is a momentum oscillating indicator that primarily helps traders identify overbought and oversold areas. However, it can also be used to identify strong trend momentum and assist traders in finding crucial price levels to join an existing trend.
- A common way to trade with CCI is to identify potential market reversal zones.
- Traders have started using the Commodity Channel Index on all sorts of timeframes even though it was initially designed to spot long-term trend changes.
- Over 20 years of testing, it produced a return of 1180% versus a buy-and-hold strategy profit of 555%.
- Placing CCI directly behind the price makes it easy to compare indicator movements with price movements.
- The Commodity Channel Index is a lagging indicator because it relies on the past price data to generate trading signals.
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The Commodity Channel Index does not have predetermined threshold levels like the RSI. The readings above or below +100 and -100 is not be suitable for all assets and trading time frames. The Commodity Channel Index is susceptible to generate false trading signals during a choppy/range bound market. The CCI can generate signals that do not reflect the market’s direction during times of low volatility. Traders can use the Commodity Channel Index to trade different markets by applying the same principles and following the same strategies.
This difference is compared to the average difference over the time period. Comparing the differences of the averages allows for the commodities volatility. The result is multiplied by a constant to ensure that most values fall within the standard range of +/- 100. Chart uploaded below is an example of how prices react when CCI reaches overbought or oversold territories.
Later, the CCI was being used to identify potential overbought and oversold zones in all sorts of financial instruments. The CCI’s relevance persists despite being introduced several decades ago. 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.
By analyzing the price deviation based on past data, traders can better identify potential changes in price direction. Lambert’s trading guidelines for the CCI focused on movements above +100 and below −100 to generate buy and sell signals. Because about 70 cci indicator to 80 percent of the CCI values are between +100 and −100, a buy or sell signal will be in force only 20 to 30 percent of the time. When the CCI moves above +100, a security is considered to be entering into a strong uptrend and a buy signal is given.
For example, combining CCI with the Money Flow Index, Price Rate of Change, or bullish chart patterns could yield higher profits. The Commodity Channel Index measures the deviation of a commodity’s price from its statistical mean. It comprises a zero line and an unbounded oscillator, which moves above and below zero. As the oscillator rises or falls, the indicator’s value also changes. When it reaches certain levels, it is considered overbought or oversold.
HowToTrade.com takes no responsibility for loss incurred as a result of the content provided inside our Trading Academy. By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets. We have no knowledge of the level of money you are trading with or the level of risk you are taking with each trade. Even though the CCI indicator is an excellent trading tool, it certainly has some limitations.
Is the CCI Indicator Accurate?
- The CCI determines when a trend may be reversing and can detect when prices are overbought or oversold.
- Money Flow Index is a very profitable indicator, also Heikin Ashi charts, combined with the rate of change, RSI, and bullish chart patterns.
- Technical analysis focuses on market action — specifically, volume and price.
- The Commodity Channel Index measures the deviation of a commodity’s price from its statistical mean.
- While everyone was panic selling, the CCI indicator was screaming « buy! » If you had known what I’m about to share with you, you could have caught that massive move too.
Trend changes can be identified when CCI crosses a specific threshold between zero and 100. Regardless of how CCI is used, chartists should use CCI in conjunction with other indicators or price analysis. Another momentum oscillator would be redundant, but On Balance Volume (OBV) or the Accumulation Distribution Line can add value to CCI signals. CCI is a very well-known and widely-used indicator that has gained level of popularity in no small part of its versatility. Besides overbought/oversold levels, CCI is often used to find reversals as well as divergences. Originally, the indicator was designed to be used for identifying trends in commodities, however it is now used in a wide range of financial instruments.
On the left side, the purple box represents the conjunction of price and CCI when CCI was in an overbought zone. Prices corrected sharply towards downside till a point when the positive divergence got created as marked by black arrows. Price managed to form a double bottom and appropriate candlestick patterns were spotted to further solidify a view towards upside.
A bearish divergence can be confirmed with a break below zero in CCI or a support break on the price chart. Conversely, a bullish divergence can be confirmed with a break above zero in CCI or a resistance break on the price chart. The definition of overbought or oversold varies for the Commodity Channel Index (CCI). ±100 may work in a trading range, but more extreme levels are needed for other situations.
At first, the CCI is a lagging indicator, which means that in some cases, it may provide false signals. Then, the CCI is an unbound indicator, which can be pretty confusing to analyze the market using it. This makes the use of the CCI indicator subjective and should involve a trial and error process before you can effectively use it. It signals overbought/oversold conditions above +100 and below -100.
It auto-detects trendlines, patterns, and candlesticks, backtests ideas, and lets you use AI to create unique strategies and launch trading bots—with no code. Price crossing below oversold conditions may signify a reversal to a rise in price. 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. As we mentioned above, there are several ways to use the CCI indicator to find trading signals.