CCI Trading Strategies: How to Trade with CCI Indicator | CFI JO
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How to use CCI indicator

How to trade using the Commodity channel index (CCI)

Introduction

Technical Indicators is a mathematical formula calculated from price data to provide traders with some information that cannot be easily shown from pure prices like momentum and volatility. Indicators have two major classifications trend-following Moving averages and Bollinger Band and Oscillators like Commodity Channel Index (CCI) and Stochastics.

Commodity Channel Index (CCI)

The Commodity Channel Index was first described by Donald lambert in the October 1980 Issue of commodities magazine. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can be successfully applied to indices, ETFs, stocks, and other securities. The CCI formula creates a conveniently used number that statistically expresses how far recent prices have departed from a moving average. In this manner, CCI can be used to identify overbought and oversold levels.

Commodity Channel Index calculation

The CCI formula calculates a simple moving of average daily prices and then calculates the mean deviation. The mean deviation is the sum of the differences between each period’s average price and its simple moving average. The mean deviation is then multiplied by a constant 0.015 and divided into the difference between the simple moving average and today’s average price. The trader can vary the number of periods used to calculate the simple shortening of the time span makes the index faster and more responsive to small market movements while lengthening the time span slows down the index and smooths out the market volatility

 

1- Typical Price= (H+L+C)/3
2- 20 SMA of the Typical Price
3- Calculate the Mean Deviation of price from the 20 SMA MD= abs (TP1-20SMA) +(TP2-20SMA) + --------+ (TP20 – 20SMA)/20
4- CCI = (Today Typical Price – Today Moving average)/MD* 0.015

 

The CCI is displayed as an oscillator that ranges above or below the zero line as shown in figure 1. Since the index measures how far prices have diverged from a moving average. CCI allows us to measure the strength of the trend. The theory is that the higher the CCI value the stronger the trend.

The CCI ranges above or below the zero line

Figure 1

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Commodity Channel Index on the chart

Figure 2

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Trading with CCI

You cannot use the CCI signal alone without taking trend analysis into consideration because every market phase has a different trading characteristic. In an uptrend using CCI to time, the buy signal will always be the best CCI trading strategy, and in a downtrend using CCI to time the short signal.

How to trade using The CCI indicator in an uptrend?

During uptrend buyers always have control over price movement and the best trades are always around the end of the downward retracement where the best risk-reward is always so CCI can be used to time the entries.

 

In a strong uptrend, the CCI indicator will oscillate between the 100 level and zero level as shown in figure 3.

 

1- Buy signal is generated whe