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Brian Hayslip

How does a Commodity Channel Index work?

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The Commodity Channel Index (CCI) is an oscillator used to predict trends or to signify that a stock is overbought or oversold. It’s used as both a leading indicator and a continuation indicator, and it measures both price direction and strength. The formula for CCI is (typical price - moving average) / (0.015 x standard deviation), with “typical price” defined as (High + Low + Close) / 3 for each period. The index was developed by Donald Lambert; he established the 0.015 constant so that the majority of the values would be within the -100 to +100 range. Unlike the RSI, which is bound to a range of between 0 and 100, CCI is unbound to any particular range. Interpreting the CCI, a high positive correlates with prices well above average, indicating strength. A high negative indicates lower prices and suggests weakness. Most values, as mentioned above, will fall between -100 and +100; when values exceed that range, it generally signals an extended upward or downward trend. Divergence in the indicator, such as when the CCI is falling but price is rising, suggests weakness in the trend, but not necessarily an imminent reversal. Generally, a positive reading is bullish and a negative one is bearish but using a crossover from positive to negative or vice versa as a trade signal will result in whipsaws, or situations in which price doesn’t follow the signal, resulting in a loss on the trade. Waiting for CCI to rally to 100 (or -100) is safer, although sometimes the signal will come too late and the price is already entering a correction. One of the limitations in using an unbound indicator like the CCI is that reversals don’t always occur at the 100 or -100 mark. For some stocks, the reversal may come at +/-150, and with others, you may not see a reversal until you hit +/-300. It’s a good idea to zoom out your chart so you can see more price reversals and mark the CCI readings. Adjusting the time interval setting is another way to make the CCI more accurate for trade signals. The default is set for 20 days, but you can lower the potential for false readings by setting a more optimal interval. One method is to measure the time between two highs or two lows and divide that number by 3; use that figure as your CCI parameter. In other words, if a cycle from low to low was 120 trading days, set the CCI to 40. As an oscillator, the CCI functions much like any other oscillator, and you can use it in the same way to identify buy and sell signals. If the CCI crosses 100 and begins to curve downward, or if there is bearish divergence between the CCI and price movement, those could be possible sell signals. In the chart above, you’ll notice that reversals in AbbVie stock occur closer to the +200 and -200 levels, and that buy and sell signals are confirmed by other indicators like signal-line crossovers in the MACD. The CCI shouldn’t be used alone, but in combination with other indicators such as pivot points or price channels, to help confirm signals.

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Hi Brian,

Thanks for asking.

The Commodity Channel Index or CCI, gives traders an asset value’s deviation from the asset’s statistical average. Traders apply it in defining cyclical conditions and the latest commodity market trends.
To arrive at CCI, take the Typical Price, TP, of your chosen commodity, subtract the value of the commodity’s Simple Moving Average within the same period, that is, Average Typical Price, initialed ATP, and dividing the resulting value by the Mean Absolute Deviation, MAD, of the commodity’s Typical Price.
The CCI oscillator lets traders identify extremes and trend strengths in prices. Some traders interpret price extremes when CCI falls outside the plus100 and minus 100 border, thereby looking for price reversals within such ranges.
Another strategy features interpreting a plus 100 CCI as indicating a breakout and deciding to trade within this trend until this CCI ventures back under plus 100. Conversely, CCI falling under minus 100 creates a robust downtrend, signaling a trader to short positions.
 

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Hello Brian,

This oscillator spots a security’s cyclical movements. Though the CCI swings past zero, the absence of a top and bottom limit emphasizes its function as a momentum indicator. Like RSI’s and slow stochastics, CCI’s have a 14-period default. Note that a short setting increases the sensitivity and total signals.

This indicator compares an asset’s price change with its average price movement. By showing prices beyond the average, soaring positive figures indicate strength. Conversely, low negative figures indicate below-average prices, hence, representing weakness.
The CCI not only acts as a coincident but also a leading signal. As a coincident metric, shifts past +100 mark a price action strong enough to spark an uptrend. Those under -100, on the other hand, anticipate a downtrend triggered by weak price action.
As a leading signal, speculators track oversold and overbought positions likely to predict mean reversions. Again, bearish and bullish variations may uncover momentum changes and foretell trend reversals. While it’s mostly used for analyzing commodities, the CCI also applies to stocks.



 

Edited by Leonel

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Hi Brian, thanks for being here.

The Commodity Channel Index (CCI) refers to an oscillator used to determine the current price level in relation to an average price level for a particular time period. The index is considered relatively high when prices are much higher than their average, and relatively low when prices are much lower than their average. This way, CCI is used to determine overbought and oversold levels. 

The CCI value that’s above zero indicates the price is above the historic average, while the CCI value lower than zero suggests that the price is below the historic average.

High CCI value of 100 or move tell us that the price is far above the historic average, and similarly, low readings under -100 indicate a price that’s below the historic average.
 

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