WHAT IS THE CCI INDICATOR?

What is the CCI indicator? How to use the formula? To answer all your questions, Coinstrategists has compiled a series of extremely useful and detailed knowledge. Read this article now to discover and understand them better!

WHAT IS THE CCI INDICATOR? 

The CCI indicator, or commodity channel indicator, is a versatile tool used to identify price trends and warn of overbought or oversold levels. Developed by Donald Lambert and introduced in “Commodities” magazine in 1980, the CCI was originally used to identify commodity cycles but can also be applied to stocks, cryptocurrencies, and forex pairs.

Generally, the CCI measures the current price compared to the average price over a given period of time. The CCI is relatively high when the price is well above the average, but relatively low when the price is lower than the average. In this way, the CCI can be used to identify oversold or overbought levels.

CCI INDICATOR CALCULATION FORMULA

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

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

Explanation of the steps to calculate the CCI indicator: 

• Average price = (Peak price + Bottom price + Close price) / 3 
• Calculate the SMA simple moving average value of the average price. The commonly used initial time frame is 20 days. But now it is more common to use the 14-day time frame. 
• 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, with the development of analytical tools and software such as MT4 or MT5, performing this calculation yourself is no longer important. I will provide a formula for you to visualize the calculation.

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 oscillates above or below the 0 level. It moves into two positive or negative zones. 

The index has gains above 100 reflecting strong price action that could signal the start of an uptrend. Drops below -100 reflect weak price action that may signal the start of a downtrend. 

About two-thirds of the CCI’s value is between -100 and 100. The remaining 1/3 of the value is outside that range. This indicates the weakness or strength of the price movement. 

It 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 detect early shifts and predict trend reversals. 

USING THE CCI INDICATOR IN TREND IDENTIFICATION

Let’s analyze the example of using the CCI indicator to identify trends: 

The chart below uses CCI-20 days. There are 4 trend signals within seven months (marked with blue, red 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 time frame. As the property in the illustration peaked on January 11 and then collapsed. The CCI moves below the -100 level after the next 8 days to signal the start of a prolonged move. 

After that, the price bottomed out on 08-02. The CCI indicator moved above 100 6 days later to signal the start of a prolonged correction. The CCI does not capture the exact top or bottom price. But it can help filter out insignificant moves and focus on the larger trend.

The CCI triggered a bullish signal when the price crossed 60 in June, which may have caused some traders to consider overbought. The focus is on bullish setups with a low risk-reward ratio. The asset recovered about 60% of its previous decline and formed a bearish flag pattern at the end of June. The subsequent rise above the trendline provided another bullish signal and the CCI remained bullish.

– Join telegram channel here

– What is Dow theory?

IDENTIFY OVERBOUGHT AND OVERSOLD LEVELS WITH THE CCI INDICATOR

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

• Firstly, the CCI is a non-correlated oscillator. In theory, there is no limit to the rise or fall. That is, it is greater than 100 and can be less than -100. This makes judging overbought or oversold subjective. 
• Second, asset prices may continue to rise higher after the CCI is overbought. Similarly, the price of that asset may continue to decline after the CCI indicator is oversold.

The definitions of overbought and oversold differ for the Commodity Channel Index (CCI). There are also values of -200 and 200 which are a much harder level to reach and represent a true overbought, oversold level. 

The chart below shows the GOOG asset and the use of the 20-day CCI indicator. The horizontal lines at the -200 and 200 marks have been added to the chart.

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

As can be seen, this is an unclear pattern and signal. Notably, GOOG continues to move higher even after the CCI was overbought in mid-September and moved below -200.

BULLISH AND BEARISH DIVERGENCE

Notion:

An upward divergence occurs when the price makes a lower bottom. The CCI indicator formed a new higher bottom, which indicates less decline. 

Bearish divergence forms when the price is recorded to create a new higher high. The CCI formed a new lower peak, indicating less upside.

Before believing too much in divergences as reversal indicators, be aware that divergences can be misleading in a strong trend. 

Example: a strong uptrend can show multiple bearish divergences before a new peak is established. In contrast, bullish divergences often appear in prolonged downtrends. 

While divergences can herald trend reversals. Chart analysts should set a confirmation point for the CCI or price chart. Bearish divergence can be confirmed with the CCI breaking below the 0 level or breaking the support zone on the price chart. Similarly, a bullish divergence can be confirmed with the CCI breaking above the 0 level or breaking the resistance zone on the price chart.

Example: The chart below uses the 40-day CCI. Longer timeframes to reduce price volatility. There are three sizable divergences over a period of 7 months. 

First, the price pushed to a new high in early May. But the CCI did not exceed the March highs and formed a bearish divergence. A break of the support zone on the price chart and the CCI moving into the -100 zone confirms the divergence a few days later. 

Next, a bullish divergence formed in early July as the price moved to a lower bottom. But the CCI formed a higher bottom. This divergence was confirmed when the CCI moved up to the 100 zone. 

It was also noted that asset prices filled the gap (Filled GAP) at the end of June with a spike in early July.

Finally, a bearish divergence formed in early September and was confirmed as the CCI entered the -100 zone. Despite the CCI confirmation, the price never breaks the support zone, and the divergence does not lead to a trend reversal. 

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

CONCLUSION

CCI is an oscillating indicator that helps determine the top or bottom of an asset’s price and indicates weakness or the end of a trend. Helps you enter or exit trades at the right time. Combine CCI with indicators on Coinstrategists. All available on the website. This article is not investment advice, please do your own research.