Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

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Definition
and
Uses
REVIEWED BY CORY
MITCHELL
| Updated Jun 25, 2019

What is the
Commodity
Channel
Index (CCI)?
Developed by
Donald Lambert,
the Commodity
Channel Index​

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

(CCI) is a
momentum-
based oscillator
used to help
determine when
an investment
vehicle is reaching
a condition of
being overbought
or oversold. It is
also used to
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assess price trend
direction and
strength. This
information to
allows traders to HK$1,508
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to
want to enter or
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exit a trade,
to
refrain from
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add to an existing
position. In this
way, the indicator
can be used to
provide trade
signals when it
acts in a certain
way.

TradingView.

KEY

TA K E A W AYS
The CCI

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

measures
the
difference
between
the
current
price and
the
historical
average
price.
When the
CCI is
above
zero it
indicates
the price
is above
the
historic
average.
When CCI
is below
zero, the
price is
below
the
hsitoric
average.
High
readings
of 100 or
above,
for
example,
indicate
the price
is well
above

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

the
historic
average
and the
trend has
been
strong to
the
upside.
Low
readings
below
-100, for
example,
indicate
the price
is well
below
the
historic
average
and the
trend has
been
strong to
the
downside.
Going
from
negative
or near-
zero
readings
to +100
can be
used as a
signal to
watch for
an

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

emerging
uptrend.
Going
from
positive
or near-
zero
readings
to -100
may
indicate
an
emerging
downtrend.
CCI is an
unbounded
indicator
meaning
it can go
higher or
lower
indefinitely.
For this
reason,
overbought
and
oversold
levels are
typically
determined
for each
individual
asset by
looking
at
historical
extreme
CCI levels
where

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

the price
reversed
from.

The Formula
For the
Commodity
Channel
Index (CCI)
Is:
Typical Price
CCI =
.015 × Mean Deviation
where:
Typical Price =
P = Number of periods
MA = Moving Average
Moving Average
Mean Deviation

How to
Calculate
the
Commodity
Channel
Index (CCI)
1 . Determine
how many
periods your
CCI will analyze.
20 is commonly
used. Fewer
periods results
in a more

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

volatile
indicator, while
more periods
will make it
smoother. For
this calculation,
we will assume
20 periods.
Adjust the
calculation if
using a different
number.
2 . In a
spreadsheet,
track the high,
low, close for 20
periods and
compute the
Typical Price.
3 . After 20
periods,
compute the
Moving Average
of the typical
price by
summing the
last 20 Typical
Prices and
dividing by 20.
4 . Calculate the
Mean Deviation
by subtracting
the Moving
Average from
the Typical
Price for the last
20 periods. Sum
the absolute
values (ignore

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

minus signs) of
these figures
and then divide
by 20.
5 . Insert the most
recent Typical
Price, the
Moving
Average, and
the Mean
Deviation into
the formula to
compute the
current CCI
reading.
6 . Repeat the
process as each
new period
ends.

What Does
the
Commodity
Channel
Index (CCI)
Tell You?
The CCI is
primarily used for
spotting new
trends, watching
for overbought
and oversold
levels, and
spotting
weakness in
trends when the
indicator diverges
with price.

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

When the CCI

moves from
negative or near-
zero territory to
above 100, that
may indicate the
price is starting a
new uptrend.
Once this occurs,
traders can watch
for a pullback in
price followed by
a rally in both
price and the CCI
to signal a buying
opportunity.

The same concept

applies to an
emerging
downtrend. When
the indicator goes
from positive or
near-zero
readings to below
-100, then a
downtrend may
be starting. This is
a signal to get out
of longs or to start
watching for
shorting
opportunities.

Overbought and
oversold levels
are not fixed since
the indicator is
unbound.

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

Therefore, traders
look to past
readings on the
indicator to get a
sense of where
price reversed.
For one stock, it
may tend to
reverse near +200
and -150. Another
commodity may
tend to reverse
near +325 and
-350. Zoom out on
the chart to see
lots of price
reversal points,
and the CCI
readings at those
times.

There are also

divergences. This
is when the price
is moving one way
but the indicator
is moving
another. If the
price is rising and
the CCI is falling,
this can indicate a
weakness in the
trend. While
divergence is a
poor trade signal,
since it can last a
long time and
doesn't always
result in a price

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

reversal, it can be
good for at least
warning the
trader that there
is the possibility
of a reversal. This
way they can
tighten stop loss
levels or hold off
on taking new
trades in the price
trend direction.

The
Difference
Between the
Commodity
Channel
Index (CCI)
and the
Stochastic
Oscillator
Both of these
technical
indicators are
oscillators, but
they are
calculated quite
differently. One of
the main
differences is that
the Stochastic
Oscillator is
bound between
zero and 100,
while the CCI is
unbounded. Due
to the calculation

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

differences, they
will provide
different signals
at different times,
such as
overbought and
oversold readings.

Limitations
of Using the
Commodity
Channel
Index (CCI)
While often used
to spot
overbought and
oversold
conditions, the
CCI is highly
subjective in this
regard. The
indicator is
unbound and
therefore, prior
overbought and
oversold levels
may have little
impact in the
future.

The indicator is
also lagging,
which means at
times it will
provide poor
signals. A rally to
100 or -100 to
signal a new trend

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

may come too

late, as the price
has had its run
and is starting to
correct already.
Such incidents are
called whipsaws;
a signal is
provided by the
indicator but the
price doesn't
follow through
after that signal
and money is lost
on the trade. If
not careful,
whipsaws can
occur frequently.
Therefore, the
indicator is best
used in
conjunction with
price analysis and
other forms of
technical analysis
or indicators to
help confirm or
reject CCI signals.
(For related
reading, see "How
Traders Use CCI
(Commodity
Channel Index) to
Trade Stock
Trends")

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

and Uses
The Money Flow
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Detrended
Price
Oscillator
(DPO)
Definition
and Uses
A detrended price
oscillator is an
oscillator that strips
out price trends in
an effort to estimate
the length of price
cycles from peak to
peak or trough to
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Price Rate Of
Change
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ROC
Definition
and Uses
Price rate of change
(ROC) is a technical
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between the most
recent price and a

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Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

price in the past. It

can be used to help
identify trends, help
confirm reversals,
and highlight where
reversals may occur.
more

Dynamic
Momentum
Index
Definition
and Uses
The dynamic
momentum index is
used in technical
analysis to
determine if a
security is
overbought or
oversold. It can be
used to generate
trading signals in
trending or ranging
markets. more

True Strength
Index (TSI)
Definition
and Uses
The true strength
index (TSI) is a
technical
momentum
oscillator used to
provide trade
signals based on
overbought/oversold
levels, crossovers,
and divergence. The
indicator is based on
double-smoothed
averages of price
changes. more

https://www.investopedia.com/terms/c/commoditychannelindex.asp Page 16 of 20
Commodity Channel Index - CCI Definition and Uses 23/11/2019, 5:41 PM

Ultimate
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Strategies
The Ultimate
Oscillator is a
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developed by Larry
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momentum of an
asset across
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timeframes. It
produces buy and
sell signals based on
divergence. more

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