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Commodity Channel Index (CCI)

Utility: Evaluating Overbought / Oversold Market Levels

Standard Settings: 20 Periods

The Commodity Channel Index or CCI can identify if an asset or a market is trading at overbought or oversold levels. CCI is able to measure the current position of a financial asset with respect to its moving average. CCI can also signal trades as you can see below.


Commodity Channel Index Calculation

CCI = (TP - SMA (20) of TP) / (Constant x Mean Deviation)


TP (Typical Price) = (High + Low + Close) / 3

Constant = .015


Mean Deviation can be calculated as follows:

i) The 20-period average of the Typical Price is subtracted from each period's Typical Price

ii) The absolute values of these numbers are taken

iii) The absolute values are summed

iv) The total number is divided by the total number of periods. In our case by 20 periods.


Trading with the Commodity Channel Index

The CCI can offer buy and sell trading signals. The crucial points are -100 and +100.

When CCI is found below -100 and suddenly moves above -100 you get a buy signal

When CCI is found above +100 and suddenly moves below +100 you get a sell signal

Commodity Channel Index (CCI)

Note: CCI is more effective in ranging markets than in trending markets. Furthermore the signals are more reliable when CCI has spent a number of time periods above +100 in case of selling signals or below -100 in case of buying signals. Finally, when a divergence between the slope of the price chart and the CCI chart occurs then CCI can offer even more powerful trading signals. That divergence between the CCI and the price chart may be either bullish or bearish.





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Commodity Channel Index (CCI)

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