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What is the CCI indicator? Guide people to use detailed commodity channel indicator

commodity channel indicator

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What is the Indicator (CCI)?

CCI . indicator The commodity channel indicator is a versatile indicator used to identify price trends or warn of overbought and oversold levels.

The indicator was introduced in “Commodities” magazine in 1980 and it was developed by Donald Lambert.

Initially, the author used CCI to determine the cyclical rotations in commodities. But this index can be successfully applied to asset classes such as stocks, electronic money, forex pairs,..

Watch now: What is the foreign exchange market?

In general, the CCI measures the current price relative to the average price over a given period. The CCI is relatively high when prices are well above the average, but relatively low when prices are below the average.

In this way, the CCI can be used to identify oversold or overbought levels.

commodity channel indicator CCI

The formula for calculating the CCI . indicator

The formula for calculating the following CCI index is specified by the author of this indicator himself:

CCI = (Average Price – SMA20 of typical price) / (0.015 x Average Deviation)

Explaining the steps to calculate the CCI indicator:

  • Average price = (High price + low price + close price) / 3
  • Calculate the simple moving average (SMA) value of the average price. The commonly used initial timeframe is 20 days. But nowadays it is more common to use the 14-day timeframe.
  • Take the absolute value of the Average Price and the 20-day SMA.
  • Calculate the standard deviation of the SMA and 0.015 as a constant.

Today, at a time when analytical tools and software have developed greatly, you do not have to pay much attention to performing this calculation. By apps like MT4 or MT5 will help you to solve this problem. I give the formula just to help you visualize how it calculates.

How the CCI . indicator works

The CCI indicator measures the difference between the current price and the average price over a period of time. The indicator fluctuates above or below zero. It moves into either positive or negative zones.

This indicator has a rise above 100 reflecting strong price action that could signal the start of an uptrend. Drops below -100 reflect weak price action that could signal the start of a downtrend.

About two-thirds of the CCI's value is between -2 and 3. The remaining one-third is outside of that range. This shows the weakness or strength of the price movement.

This is a leading indicator, chart analysis can look for overbought, oversold conditions and herald an average price reversal.

Similarly, bullish and bearish divergences can be used to spot early moves and predict trend reversals.

Now, will guide you to trade in each case.

Using the CCI indicator in trend identification

Let's analyze an example of using the trend-defining CCI indicator:

The chart below uses the 20-day CCI. There are 4 trend signals within seven months (marked with red and green arrows). Compared to the chart, the 20-day CCI is not suitable for long-term signals.

It is recommended to analyze the chart on a weekly or monthly timeframe. As the asset in the illustration peaked on January 11th then collapsed. CCI moves below -01 level after next 100 days to signal the start of a prolonged move.

After that, the price bottomed on February 08th. The CCI indicator moved above 02 100 days later to signal the start of an extended correction. CCI does not capture the exact top or bottom price. But it can help filter out insignificant moves and focus on the larger trend.

CCI triggered a bullish signal when the price rallied above 60 in June. Some traders may have considered overbought.

With bullish signals, the focus is on bullish setups with low risk-reward. Note that the asset has regained about 60% of its previous fall and formed a bearish flag pattern at the end of June. The subsequent spike above the trendline provided another bullish signal and only CCI indicator is still in boost mode.

identify emerging trends with cci

Identify overbought and oversold levels with the CCI . indicator

Determining the overbought and oversold levels is quite difficult with the CCI indicator because:

  • first, the CCI is a linkless oscillator. In theory, there is no limit to increase or decrease. That is, greater than 100 and possibly less than -100. This makes the assessment of overbought or oversold subjective.
  • Monday, the asset price may continue to move higher after the CCI is at overbought level. Similarly, the price of that asset can continue to fall after the CCI indicator is at oversold levels.

The definitions of overbought and oversold differ for the Commodity Channel Index (CCI). Also the values ​​-200 and 200 are a much harder level to achieve and represent a true overbought and oversold level.

The chart below is the GOOG asset and the usage of the 20-day CCI indicator. Horizontal lines at -200 and 200 have been added to the chart.

From the beginning of February to the beginning of October, the CCI exceeded the 2 level more than 10 times. The red dashed lines show the CCI moving back below 200. The blue dashed lines show when the CCI moves back above -4.

As can be seen, this is an unclear pattern and signal. Of note, GOOG continued to move higher even after the CCI was overbought in mid-September and moved below -9.

CCI indicator and google stocks

Bullish and Bearish Divergence

Concept

  • A bullish divergence occurs when the price makes a lower low. The CCI indicator is forming a new higher low, which indicates less downside momentum.
  • A bearish divergence forms when prices make a new higher high. On the other hand, CCI formed a new lower high, showing less upside momentum.

Before relying too heavily on divergences as reversal indicators, be aware that divergences can be misleading in a strong trend.

For example: A strong uptrend can show multiple bearish divergences before a new top is formed. Conversely, bullish divergences often occur during prolonged downtrends.

While divergence can herald a trend reversal. Chart analysts should set confirmation points for CCI or price charts.

A bearish divergence can be confirmed with CCI breaking below zero or support on the price chart. Similarly, a bullish divergence can be confirmed with CCI breaking above zero or breaking resistance on the price chart.

For example

The chart below uses the 40-day CCI. Longer time frame to reduce price volatility. There are three sizable divergences over a 7-month period.

First, the price pushed to a new high in early May. But the CCI did not break above the March high and formed a bearish divergence. A price chart support break and CCI move into the -5 zone confirmed the divergence a few days later.

Next, a bullish divergence formed in early July as the price moved to a lower low. But CCI formed a higher low. This divergence was confirmed when the CCI moved up to the 7 zone.

Also note that asset prices filled the gap (Filled GAP) in late June with a spike in early July.

Finally, a bearish divergence formed in early September and was confirmed when the CCI entered the -9 zone. Despite the CCI confirmation, the price never broke the support area and the divergence did not lead to a trend reversal.

So it can be stated that: Not all divergences produce good signals. Depending on the case as analyzed.

cci indicator and divergence

Interpretation of symbols on the chart:

  • Higher high: The higher peak.
  • Filled gap: Filled the gap.
  • Lower low: Lower low
  • Confirmation:Confirmation
  • Bearish divergence: Bearish divergence
  • Bullish divergence: Bullish divergence

Summary

So to summarize a few points you have learned through the analysis using the CCI indicator:

The CCI (Commodity Channel Indicator) is an oscillator that helps you determine the top or bottom price of an asset class. May indicate a weakening or ending of a trend. Thereby helping you enter a trade as soon as the trend is starting or exit a trade before it goes against you…

Finally, combine the CCI with the indicators that Blogtienao mentioned. All indicators are provided in full on the website. This article is not investment advice, please do your own research and evaluation. Thanks!

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