What Is The Commodity Channel Index (CCI) +

2 Trading
Trading Strategies
The Commodity Channel Index indicator was designed by Donald Lambert and fits into the category of
being a momentum indicator for those involved in technical analysis. Due to the lines on the indicator,
indicator,
it is often used as an oversold and overbought indicator.
That can often be a flawed use of the CCI considering it is a momentum oscillator that is designed to
show momentum in the market. It stands to reason that if a market has enough momentum to drive the
CCI into overbought territory,
territory, that indicates the market is strong.
Some will argue that an overbought market is in line to reverse at least temorarily
temorarily.. There!s a saying
that a market can remain overbought longer than you can remain solvent .
I agree. "any traders loving trad
trading
ing rev
reversa
ersals
ls in the market and use the CCI to #ustify their oinion that
the market $is due for a ullback$.
The designer, Donald Lambert, actually looked at oversold or overbought conditions as a reason to
trade in that direction with the theory that strength in the market is a good thing.
If the CCI goes above the % &'' line, that!s a signal to establish a long osition. (hen the
CCI dros below the % &'' line, the long osition is closed out. The same techni)ues aly
to short ositions at the *&'' line. +
+ou
ou can modify the CCI to set your own arameters.

+ou #ust have to rely on a trading lan that has secific criteria for entering the market so you are not
deending on a lagging indicator for the basis of your trading.

ow To Calculate CCI

The good thing is that most charting
ch arting latforms have the CCI built into their indicator selection. It never
hurts to have an understanding of how the CCI is calculated to hel you fully understand the nuances of
this trading indicator.
indicator.
CCI ! (Ty"ical #rice $ 2% #eriod S&' o Ty"ical "rice)  (*%, x &ean -eviation)
Ty"ical #rice ! (igh + .ow + Close)/
ee in mind that some traders may alter how the tyical rice is calculated but for now, 0ust ocus
ocus on
the acce"ted calculation*
(hy is '.&- used /ere is how
h ow Lambert exlained that figure0
The use of a .'&-
.'& - constant in the CCI formula scales the resulting CCI value so 1'2 to
3'2 of the random fluctuations fall within a %&''2
%&'' 2 to *&''2 channel

(hat that means that if the Commodity Channel Index heads into the oversold or overbought
condition, that is outside the normal fluctuations of a market. That indicates strength 4or weakness5 and
is a good time to either lace a trade or exit one you are currently in.
, TI1S 345 166- T4 714W '845T CCI I1-IC'T49
I1-IC'T49
&. CCI is an indicator
indicator that is classified
classified as an oscillator.
oscillator. 6scillators tend to have levels that indicates
overbought or oversold.
7. If the rice of a currency air is overbought then iitt would read over %&''. ((hat
hat this means is
the the currency air!
air !s rice has risen with momentum and h has
as deviated from the normal
fluctuations of the that market..

8. The CCI oscill

oscillates
ates below
below and above 9ero
9ero level.
level.
:. (hen the Commodity
Commodity channel
channel index reads *&'' then
then the market or ric
ricee at the time is
considered oversold. (hat this means is the the currency air!
air !s rice has fallen with momentum
and has deviated from the normal fluctuations of the that market..
-. The CCI
CCI is
is a lagging
lagging indicato
indicatorr
To summari:e so ar; the CCI is an indicator that measures how far aart the rice is moving away
from the average rices. It the CCI reads overbought or oversold then this tells you that the rice has
exceeded the normal rice movement4the standard deviation5 away from the average.

#948.6&S WIT 5SI1 CCI T4 T9'-6

If you were to follow the trading signals generated by CCI, without any other technical analysis or
rice action study,
study, then these are the roblems you will encounter as shown by the chart below0

Commodity Channel Index Trade ;xamles

1otice on the chart above that(starting rom let);
&. <uy signal
signal was
was a false
false buy signal
signal
7. Second buy signal
signal by the CCI after
after it bounced
bounced back u from the *&''
*&'' line was ok and would
would
have resulted in rofits.
8. Third sell
sell signal
signal given by CCI was false
false as it was
was too early
:. The :th trading signal given by the CCI was false as you can see that the tr
trend
end was still u but
yet the commodity channel index indicator gave a sell signal
-. The -th sell signal
signal was
was good and would have
have been a rofitable
rofitable trade.
trade.
=. The =th buy signal after
after bouncing u from the *&''
*&'' CCI line would have been rof
rofitabl
itablee
1. The 1th signal was a sell signal generated by CCI and notice that this
this signal was
was given ater
there was already a downward move>thus the statement that because CCI is a lagging
indicator, it gives you the signal to trade ? at least one candle ater the o"timal entry "oint in
"rice

Why 5se The CCI I It as These Issues<

Trading the CCI all alone by itself will do you no good but having said that, here!s
here!s a few reasons for
keeing the CCI indicator in your
yo ur trading tool chest.
 CCI can be useful as a decision*suorting tool

 CCI can be used to identify divergence 4CCI Divergence5 on the chart

 /el identify overbought or oversold conditions

 It!s a great tool for swing trading and entry triggers

So can we tie all the good things about the CCI into something that we can actually trade as a @orex
strategy
Absolutely.

Two 4 The 8est Ways to 5se The CCI 's #art 4 ' Trading
Strategy
&. Tr
Trading
ading CCI with
with "oving
"oving Average
Averagess
7. Tr
Trading
ading CCI with
with suort
suort and resistance
resistance levels
levels

=; 4W T4 T9'-6 CCI

CC I WIT &4>I1 '>69'6S
'>69'6S
The logic for this is very simle0 moving averages show us the trend but CCI is an oscillator that #ust
shows us whether the market is oversold or overbought.
overbough t. The CCI cannot tell you about the trend but
can tell you about the strength of the trend.
8ut here?s the "roblem; you are combining two lagging @orex indicators which will not give you
otimum entries.
So to hel ut the odds in our favor, we are going to look to rice action trading to hel lessen the
lagging issue with all indicators.
ere?s an exam"le;
 (e have two moving averages, B exonential moving average and &3 exonential moving
average and they have
hav e #ust crossed over to the downside0 which means there!s
there!s a great chance
that it!s now a downtrend.

 (e do not enter a sell order immediately at the crossover of the moving averages
averages..

 (e wait until rice rallies back u to the moving averages, and then we look at the CCI to see i
it is above the %% or 0ust crossed below it*

 If that!s
that!s the case, then we know we have a sell signal to sell right there. Confirm these trading
signals with bearish reversal candlestick "atterns as shown on the chart below0
/ow To Trade CCI (ith "oving Averages

=2; 4W T4 T9'-6 CCI WIT S5##49T '1-

96SIST'1C6 .6>6.S
+ou first should fully understand how to draw suort an
andd resistance levels on your chart. These will
give you an ob0ective location to begin looking for a trading setu
 +ou see rice heading down to a suort level and then you look at the CCI indicator to see if
the market is in an oversold condition.

 If so there!s
there!s a likely chance that the market may bounce u from the suort level and go u so
look for a buy
b uy oortunity.
@or a buy trade setu"A the o""osite is true*
 if rice is heading u to a resistance level, then look at the Commodity Chanel Index to see if
the market is in an overbought condition.

 If so, there!s
there!s a great chance that the market may hit the resistance level an
andd head back down
down..
It is also a good idea to confirm these with bearish reversal candlestick "atterns to go short when
trading the bounce of a resistance level like shown on the chart below0

Commodity Channel Index Trading (ith Suort And esistance Levels

S5&&'93
 These two examles show you you can trade CCI using moving averages and suort and
resistance levels.

 There may be other ways to trade CCI with a combination of other @orex indicators,
 @ibonacci or rice action trading.

 Adding in rice action is a smart idea as this eliminates the lagging factor in your trade entries.
I!ve given you two charts above and shown you how this is done.

7ee" These CCI @acts In &ind

 +ou should know is that CCI should never be traded alone. It should be combined with other
indicators or rice action trading etc to form a trading strategy which you can use.

 CCI is a lagging indicator.

indicator. +ou
+ou will see that the otimum entry oint would have been &
candlestick back>so what can you do do avoid that

 CCI divergence is another toic but I don!t find much merit in trading divergence.

 <est otion in my oinion is to use rice action trading with the use of @orex reversal
candlesticks atterns which can allow you to enter at these otimum entry oints.