The Commodity Channel Index (CCI) is a technical indicator that shows how the price of an asset deviates from its moving average. High CCI values indicate that the asset is overbought (overbought zone), while low values suggest it is oversold (oversold zone).
Originally designed for commodity markets, the CCI indicator has proven effective on Forex and stock markets as well.
Trading Signals from the CCI Indicator
The CCI indicator is commonly used by traders for two main purposes:
1. Identifying Divergences or Discrepancies:
Divergence occurs when the price chart and the CCI move in opposite directions. For example, if the price makes a new high but the CCI does not exceed previous peaks, this indicates a divergence. This often signals an upcoming price correction.
2. Determining Overbought/Oversold Zones
This feature is embedded in the CCI calculation. Typically, the CCI fluctuates between -100 and +100. Values above +100 signal overbought conditions and potential downward correction, while values below -100 indicate oversold conditions and possible price recovery.
Formula for Calculating the CCI Indicator
The calculation of CCI values can be divided into five steps:
- Calculate the typical price by averaging the high, low, and close prices of each bar:
TP = (HIGH + LOW + CLOSE)/3
- Compute the simple moving average of the typical prices over N periods:
SMA(TP, N) = SUM[TP, N]/N
- Subtract the simple moving average from the typical price for each of the previous N periods:
D = TP – SMA(TP, N)
- Calculate the simple moving average of the absolute values of D over N periods:
SMA(D, N) = SUM[D, N]/N
- Multiply the resulting SMA(D, N) by 0.015:
M = SMA(D, N) * 0.015
- Finally, divide M by D to get the CCI value:
CCI = M/D
Where:
- HIGH – the bar’s high price;
- LOW – the bar’s low price;
- CLOSE – the closing price;
- SMA – simple moving average;
- SUM – sum;
- N – number of periods used in the calculation.
FAQ
What is the Commodity Channel Index (CCI)?
The Commodity Channel Index (CCI) is a technical indicator that measures the deviation of an asset’s price from its moving average, helping traders identify overbought and oversold conditions.
How is the CCI calculated?
The CCI is calculated using a formula that involves the typical price, simple moving averages, and absolute values. It typically ranges between -100 and +100, with values above +100 indicating overbought conditions and below -100 indicating oversold conditions.
What are the main uses of the CCI indicator?
The CCI is primarily used to identify divergences between price movements and the indicator itself, as well as to determine overbought and oversold zones, which can signal potential price corrections.
