The acronym CCI stands for Commodity Channel Index, which highlights its creator's market of choice.
Although originally designed to assist in trading commodities, the CCI has proven to be a highly versatile indicator, suitable for various asset classes such as equities, options, ETFs, Forex, and futures markets.
You can add it to your chart by following the steps below:
Click on the View Menu, select Indicators, and choose between CCI or CCI Histogram.
The original purpose behind its creation was to provide a tool that helps identify where a commodity stands within its price fluctuation cycle.
How it Works
The indicator measures the current price level relative to an average price level over a specific timeframe. Consequently, the further the price moves from the average, the higher the indicator value.
The indicator will yield positive readings when above the average and negative values when below it. Any indicator that informs the analyst how far price has deviated from its equilibrium value immediately qualifies as an overbought and oversold detector.
The two most common ways to use the CCI are:
As a continuation indicator.
As an overbought/oversold level indicator.
CCI as a Continuation Indicator
When used as a continuation indicator, the rationale is as follows: by breaking past a specific level, the CCI signals that an asset is in a strong momentum phase, which should persist for a while longer.
This application is typically recommended for shorter-term trades (day trading and swing trading), given that the current price has already established a reasonable distance from the average.
Therefore, the CCI signals in this mode are:
A buy signal is generated when the indicator crosses above the +100 level, while a sell signal occurs when the indicator crosses back down through that same level.
A short signal is generated when the indicator falls below the -100 level, while a buy signal occurs when the indicator crosses back up through that same level.
CCI as an Overbought/Oversold Indicator
This alternative approach to utilizing the CCI directly applies the overbought/oversold concept. The underlying premises here are:
The indicator measures the distance from a moving average.
Assets act like rubber bands; they can be stretched, but there is always a tendency to revert back to equilibrium, to mean values.
Market extremes occur on both the buy and sell sides.
Thus, based on these characteristics, the CCI can be used to identify the following scenarios:
Bullish vulnerability: occurs when the indicator shows values below -100.
Bearish vulnerability: occurs when the indicator shows values above +100.
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