The Commodity Channel Index (CCI) is an oscillator developed and published in 1980 by Donald Lambert, a technical analyst who specialized in mathematics and general statistics.

The CCI indicator was initially developed for the commodity market, as its name suggests, but it can be used in cryptocurrency trading, forex trading, options trading, and the stock market.

How to read and interpret the Commodity Channel Index (CCI)

There are two ways to read and interpret the commodity channel index. This is done by identifying CCI divergences or looking for CCI overbought and oversold price levels in the market. These two methods are the best signals offered by the CCI indicator.

The CCI uses the current price as an average price over a specific period. As a momentum indicator, it ranges between -100 and +100, and these values can be interpreted as:

Traders need to pay attention to other technical price indicators because the CCI, being a lagging indicator, can at times give many false signals.

Fig 1: On the CCI indicator tradingview chart above, we can observe how the CCI overbought and oversold levels are formed.

Commodity Channel Index (CCI) formula

The CCI indicator uses a simple moving average and a 0.015 mean deviation to give the trading signals. Let’s take a look at the CCI indicator formulae below, where:

CCI (Typical Price-Simple Moving Average)

(0.015 x mean standard deviation)

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

The reason why the CCI formulae rely on a constant mean deviation of 0.015 is to prevent the CCI value from falling between-100 and +100, but this will not always happen because the CCI can be used with different moving averages periods.

What is the best setting for the Commodity Channel Index (CCI) indicator?

Most trading platforms like tradingview, c-trader, mt4, and mt5 have CCI settings on 20 period, 14 period, and 50-period moving averages.

A short CCI period of less than 14 will most likely give many false market signals, while a longer CCI period of more than 50 smooths out the price, giving fewer but more accurate and profitable trading signals. Traders can adjust according to one’s preference.

FIG 2: CCI indicator tradingview chart with a 20 period.

1.CCI indicator overbought and oversold trading strategy.

Generally, traders will buy or take a long position on a security when the price reaches an oversold area in the market because it’s assumed that the sellers have depleted their orders.

In contrast, traders will sell or take a short position on a security when the price approaches an overbought area in the market.

The above conditions will not always guarantee profitable trades. This is because the CCI is a momentum indicator, meaning the price will tend to remain in overbought and oversold areas for some time before a reversal or continuation can occur.

To avoid this market situation, you should not use the commodity channel index as a stand-alone indicator for overbought and oversold signals. This can be illustrated in the chart below:

Fig 3: The CCI indicator is in the overbought area for a long time before a reversal occurs.

2.CCI indicator breakout trading strategy.

When trading CCI overbought and oversold signals, look for breakout trading opportunities in a ranging market.

Bullish breakout trading opportunities can occur when the price breaks the previous swing high of the range with an increase in momentum. In this case, wait for the CCI to rise above the +100 level. Take a long position, putting your stop loss a few pips below the upper band of the range.

A bearish breakout opportunity arises when the price is breaking below the previous swing low area of a ranging market with an increase in momentum. When the CCI falls below the -100 level, take a short position, putting your stop loss a few pips above the lower band of the range.

3. CCI Indicator Divergence Trading Strategy

Fig 4: The CCI indicator shows positive and negative divergence.

STEP 1: Wait for the CCI indicator to cross above the overbought level (+100)

When the CCI crosses above the +100 level, this shows that a security price is more stronger than its usual average price, giving us an opportunity to buy or go long in a trade.

This even gets more reliable when the Commodity channel index crosses for the first time above the +100 level indicating a new bullish trend is about to start or at least an upward momentum will continue for sometime before a reversal can occur.

STEP 2: Wait for a pullback. At the same time, the market should be above the 50EMA and the CCI should be above the overbought level (+100)

Scalping requires a trader to have precise entry and exit points because we are only targeting a few pips in profit as many times as possible in a trading session. When waiting for a pullback in price is a more conservative trading approach.

However, you have an option to buy right away when the CCI crosses above the +100 level. In this case, you need to make sure enough time period has elapsed between now and the last time the CCI indicator crossed above the +100 level.

We’re going to use the more conservative method and wait for a pullback and the CCI indicator to hold above the zero line while the market is above the 50EMA during this retracement period.

In this case, to look for long or buy entries, we have to trigger signals. We wait for a retracement or a sharp price correction to take our trade in the major uptrend direction of the market.

When we have a weak retracement, it means the major trend is still strong and the market will continue to rally higher. Avoid taking trades when major retracements occur in the market.

STEP 3: Putting a protective stop loss below the recent swing low point or a few pips below the 50EMA.

To put your stop loss, identify the last recent swing low area or a few pips below the 50EMA. However, take note of the CCI indicator to identify market weakness, and if the CCI crosses below the-100 level after you’ve taken your trade, you can close the position at the market price if your stop loss wasn’t hit during the process.

STEP 4: Take profit when CCI value hits 200-250 or falls below the zero line.

We use two trading strategies when it comes to taking the profit and exiting the market.

The best-recommended exit strategy is to take profits when the CCI reaches the +200 level. However, the market will not always reach the +200 level, so when the CCI indicator crosses below the zero line, it’s a sign that the momentum is reducing. We exit our trade and bank the profits.

Fig 4: Advanced CCI indicator buying option strategy.

Note: The above explanation is when taking a long position, you can take a short position by implementing the opposite.

Which is better Commodity Channel index(CCI) or RSI

They are all oscillator types of indicators and are commonly used by traders to measure momentum in the market. Take note that the RSI measures the momentum of price changes, while the commodity channel index’s primary goal is to measure regular market deviations. You can use both of them depending on your trading strategy, or you can combine both of them.

From a conservative trader’s point of view, the commodity channel index (CCI) is more reliable than the RSI because, if you take into consideration a range between the highest and lowest price, the CCI gives an actual markup value of the trend change, unlike the RSI which gives late and in most cases, false signals.

Another disadvantage with the RSI is that it gives a signal at its peak point, whereas with the CCI you can get a signal when the trend’s momentum has started to build up. This makes the commodity channel index a great choice compared to the RSI indicator.

Watch the commodity channel index video below to understand more

Conclusion

• The CCI indicator is a powerful tool that traders can use when you take into consideration the powerful signals it gives in a given market.

• Unlike other indicators, the versatility of the CCI makes it reliable when trading stocks, forex, cryptocurrency, or even options.

• The uniqueness of the commodity channel index compared to most other oscillators like the RSI gives it an advantage because it can measure price momentum based on the typical price. A typical price that considers the high, low, and close price is a better measure of momentum than just the closing price, which is available on the RSI.

• Having a good understanding of how to use a commodity channel index can help traders be profitable in different ways. Since you understand better, you don’t have to fill your chart with many unnecessary indicators.

Relevant resources

Ken Wood. “Trade the Patterns: The Revolutionary Way of Trading the CCI

The CMT Association. “CMT Level I 2020: An Introduction to Technical Analysis

Fidelity. “Commodity Channel Index (CCI)

StockCharts. “Commodity Channel Index (CCI)