## Introduction: CCI Indicator

The CCI Indicator is one of the most commonly used technical indicators for trading system construction.

This indicator was invented in 1980 by Lambert to analyze the commodity market.

The Commodity Channel Index is a very versatile indicator that is mainly used to identify overbought or oversold conditions.

Its primary function is to search for potential reversal points.

The CCI indicator belongs to the statistical oscillator family.

It should be noted that the Commodity Channel Index indicator is an indicator that should not be used alone, but always associated with other indicators or tools of technical analysis.

## What is the CCI Indicator

The Commodity Channel Index Indicator was developed by Donald Lambert to relate the price of a commodity to the average price over a given period.

Usually, the indicator settings are 20 periods.

The Commodity Channel Index Indicator will assume a high value when prices are well above average, while it will consider a low cost when prices are below average.

The CCI indicator oscillates above or below zero and moves to positive or negative territory, like any classic oscillator.

Then the chart will be divided into two zones, where most of the values will fall between -100 and +100, while the remaining 25% of the values will fall outside this range.

The preset base value for the Commodity Channel Index indicator is +100 and -100. These are the two lines that are drawn in the CCI indicator graph.

However, some traders prefer to use another set of values: thus setting the CCI indicator to the value of +200 and -200.

Such a decision will undoubtedly lead to fewer signals for trading, but the few signals that will be shown by the CCI indicator will undoubtedly be more reliable and robust.

Our advice is to test the CCI indicator with both settings, so both +100 and -100 and +200 and -200 and perform backtests.

## How to use the Commodity Channel Index Indicator

### Strategy 1: Reversal Overbought and Oversold signals

Using this indicator for a reversal strategy, we will look for both long and short market excesses.

The oscillator value may be higher than the standard range -100, +100. In this case, we will talk about the phases of overbought and oversold.

These phases will be an input signal against the current trend.

When the Commodity Channel Index indicator line exceeds the +100 zone, we will be in overbought territory, and traders interpret it as a buying signal.

Otherwise, at the -100 level, we will be in a situation of overselling.

One stock is in the overbought zone when the price of the asset is too high compared to its average.

Situations of this kind may not last long and generally turn into sudden declines, bringing the price of the asset to its real value.

This type of strategy will work best on instruments that react well to reversal strategies.

It is, therefore, better to avoid financial instruments that tend to have long and healthy trends.

You can implement this trading system with a second indicator: for example, the RSI Indicator.

The RSI indicator was also created to identify phases of overbought and oversold and will, therefore, act as an additional filter.

### Strategy 2: Crossing the zero-line

The Commodity Channel Index Indicators will provide a long or short signal when its line crosses the zero line.

When the CCI moves above the ZERO line, the purchase signal will trigger, assuming the possibility of a reversal of the trend.

Below you can see an example chart first using +100 and -100 settings, then with +200 and -200 settings.

### Strategy 3: CCI Indicator Divergence Signal

Maybe you don’t know what a disagreement is.

We have divergences when prices on the graph move in one direction while the indicator moves in the opposite direction.

Divergences can be identified with most indicators of the technical analysis, including the CCI indicator.

Quickly acknowledging a divergence can be a significant advantage for a trader, often divergences signal turning points in the trend.

The Commodity Channel Index divergence from the asset’s price is certainly a signal to consider.

When there are divergences between CCI and prices, we are witnessing a loss of momentum and, therefore, a possible reversal.

Speaking of the CCI indicator: as with all indicators, there are two types of divergences.

#### CCI Indicator Bullish Divergence:

This divergence occurs when a downtrend is underway, while the CCI indicator is rising.

In practice, the price of an asset decreases, while the value of the Commodity Channel Index indicator increases.

This type of divergence is a sign of a possible rise in price trends, signaling a reversal of the current downward trend.

#### CCI Indicator Bearish Divergence:

This divergence occurs when there is an uptrend in the graph, while the CCI is down.

In practice, the price of an asset increases, while the value of the Commodity Channel Index indicator decreases.

This type of divergence is a sign of a possible decline in price developments.

As we have already said, it is essential to use other instruments of technical analysis, such as moving averages, in conjunction with the Commodity Channel Index indicator.

Basing your trading decisions only on the indicator generally does not generate good results in any trading system.

## How to calculate the CCI Indicator – The Formula

The calculation of the Commodity Channel Index indicator starts from the Typical Price (TP), followed by a simple moving average detection by choosing a reference time frame (n) for the TP, indicated with SMATP.

To calc the Standard Deviation, you only have to sum all these absolute values and divide their total by “n.”

The calculation in his description seems more complicated than it is.

### For the calculation proceed by following 4 points:

- subtract the most recent 20-period average from the typical price of each price period;
- assume the absolute values of these numbers;
- sum the absolute values;
- divide by the total number of points (20).

### The Formula:

- Typical price (TP) = (Maximum + Minimum + Closing price)/3;
- CCI indicator = [typical price – (moving average at N periods of Typical Price)] /(0.015 x average deviation);

The last part of the calculation of this indicator consists of applying the constant of 0.015 to the measured values according to the formula: CCI = (TP – SMATP) /(0.015 * average deviation).

The constant will aim to keep the CCI oscillator around the midline of zero.

In this way, about 70-80% of CCI will be in the -100/+100 range.

## Conclusions

The CCI indicator is a very versatile oscillator useful to identify levels of overbought and oversold or even trend reversals.

The CCI indicator becomes overbought or oversold when it reaches a final point.

The endpoint depends on the characteristics of the underlying title and the historical range of the CCI oscillator.

It is always better to use the CCI by combining it with other indicators or price action.

The Commodity Channel Index is an excellent tool but does not give a clear trading signal. It provides a suitable warning signal, but you need a confirmation using other technical analysis tools.

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