Some people look to it to tell them if an asset is overbought or oversold. Others might use it to tell them if an asset has momentum to the up or downside. Still, others might only use it to confirm signals gleaned from other indicators. How to interpret the indicator is an intensive topic that merits study unto itself.

• Conversely, when the CCI moves below −100, a downturn in the level of the asset’s price will be observed and there’ll be a signal to sell.
• Correspondingly, the CCI Amt Chg increased with the typical price too.
• Discover how to increase your chances of trading success, with data gleaned from over 100,000 IG accounts.
• The Commodity Channel Index (CCI) indicator measures an asset’s current price compared to the average price level established over a given period.

Commodity Channel Index Potential Buy Signal

It should be mentioned that the bullish trend will remain as long as the asset’s price stays over the latest swing low. 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.

Using the CCI to Spot Overbought or Oversold Conditions

Like any other oscillator, the CCI needs to be combined with an additional trading tool. Lambert set the constant at 0.015 for scaling purposes, so that roughly 70% to 80% of CCI values would fall between −100 and +100. You multiply the constant and the mean deviation so that the outcome is readable. When the CCI is higher compared to the historical average, it indicates that the asset price is above the mean level.

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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. The Commodity Channel Index is an indicator used in the technical analysis of the financial and forex markets. The CCI indicator, short for commodity channel index is a momentum based indicator and belongs to the oscillator group of technical indicators.

What is the best timeframe for Commodity Channel Index?

The take profit signal comes when one of the indicators give us an opposite signal. This happens when the CCI line enters the oversold area, which is shown by the rightmost green circle. On the other hand, if you are shorting the stock, you should look for a top near your entry price. You can simply https://investmentsanalysis.info/ use price action techniques to determine the proper location of your stop. The first strategy we will cover is a scalping method that will allow you to hit and run for small profits on a 5-minute chart. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

Typically, the index price will fluctuate over and below the zero level, indicating movement towards a positive or negative trajectory. The CCI was created by Donald Lambert, a renowned technical analyst who first made his work public in 1980 in Commodities magazine, now known as Futures. He initially developed the index to identify long-term cycles in commodity markets but has since been used by traders that have a short-term outlook on different securities. The CCI is a versatile technical indicator that could be applied across various timeframes. The choice of timeframe is largely dependent on the trader’s strategy and objectives. It is essential that traders properly backtest their strategies on different timeframes to find the one that aligns best with their trading goals.

The primary issue revolving around the CCI indicator is how to use it. In other words, there are different opinions on how traders should use it correctly. The datasets used and/or analyzed during the current study are available from the corresponding author on reasonable request.

High positive readings signal that the asset is trading more strongly than its past trend cycles predict that it should. Unlike the RSI, the CCI does not have specific range bounds, which can make it more difficult to read. 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.

Bullish and bearish divergences occur when the price moves in one way while the indicator moves in the other. Many traders use the CCI along with other indicators for further signal confirmation. A shorter period will be prone to volatility and would range between -100 and +100 in a small percentage.

It is essential to test how your strategy reacts to the indicator’s changes with paper money before applying it within your real account. If you set the period to less than 14, the line will get more reactive. Alternatively, it will be more sensitive to price information and fluctuate way more between the boundaries without breaking the lines for too long on either side of the spectrum. Or, in other words, whether the price is below or above its average for the particular period and by how much. All you have to do is understand the logic behind the indicator to know how it works and how it can help you when trading. At one time I had my securities license (Series 7) and Health and Life insurance licenses.

As it pertains to bearish divergences, the trader would first look for instance, where the asset’s price is making higher highs. A bearish divergence is confirmed when the CCI turns downwards and crosses below the zero line or a specific threshold, often +100. The CCI can be used to identify overbought or oversold conditions in a trading instrument. Zero line crossovers can also be used to determine emerging trends. When the CCI crosses above the zero line, it is often considered a bullish signal, and when it crosses below zero, it is considered bearish.