Relative Strength Index vs Commodity Channel Index: What’s the Difference?

what is cci indicator

On the other hand, when it goes below -100 and then moves back above it, traders open buying positions. The idea here is that the pullback marks the bear market’s end and signals a potential reverse market movement. Such scenarios are considered a signal of a potential extended move and filter for the current bullish/bearish market direction.

Martin Pring’s Technical Analysis Explained presents the basics of momentum indicators by covering divergences, crossovers and other signals. There are two more chapters covering specific momentum indicators with plenty of examples. In the chart above, you can note that when the price reaches a new low yet the OBV forms a new high and generates a signal of an upcoming divergence. From the part of the chart colored by the green square, it’s possible to see that a bullish candlestick appears yet the CCI remains in the oversold zone. If the price makes a new high/low and the CCI moves oppositely, it suggests a trend reversal.

A shorter period will be prone to volatility and would range between -100 and +100 in a small percentage. On the flip side, if you are using a longer period, there is a high chance of values falling between -100 and +100. Developed by Donald Lambert, the CCI is a momentum oscillator that you can use to identify trend continuation and reversal. In the following image, the price crosses the +100 level, indicating overbought conditions. The CCI indicator is usually presented on charts using a moving average type line that smooths out the data being analysed. You must first compute the typical price, using the high, low, and close for the interval.

what is cci indicator

When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. Such incidents are called whipsaws; a signal is provided by the indicator but the price doesn’t follow through after that signal and money is lost on the trade. Therefore, the indicator is best used in conjunction with price analysis and other forms of technical analysis or indicators to help confirm or reject CCI signals. Overbought or oversold levels are not fixed since the indicator is unbound.

This is achieved through comparing the current price to the historical average price over a given timeline. Like most oscillators, the CCI was developed to determine overbought and oversold levels. The CCI does this by measuring the relation between price and a moving average (MA), or more specifically, normal deviations from that average. The actual CCI calculation, shown below, illustrates how this measurement is made. The CCI was originally developed to spot long-term trend changes but has been adapted by traders for use on all markets or timeframes.

What Every Trader Ought To Know About CCI Indicator

While CCI signals at lower and higher levels than the RSI, it also provides the investor with the opportunity to trade quickly or open a trade early. It also communicates a message that the prices will revert with signals from over-buying and over-selling points. Although this can be said for practically every technical indicator, we can’t miss highlighting its importance here, as well.

what is cci indicator

If you’re getting too many or too few trade signals, adjust the period of the CCI to see if this corrects the issue. The CCI indicator is used the most when the market is in a long trend. The signals which this indicator gives you will help you understand what will happen next. Get acquainted with CCI today to perfect your trend trading skills in Forex. When you hear the “Commodity Channel Index” term for the first time, it is natural to think that it is designed to work only in the commodity markets. However, aside from futures, you can also apply it to equities, forex, and a variety of other asset classes.

CCI does not catch the exact top or bottom, but it can help filter out insignificant moves and focus on the larger trend. As noted above, the majority of CCI movement occurs between -100 and +100. A move that exceeds this range shows unusual strength or weakness that can foreshadow an extended move. Technically, CCI favors the bulls when positive and the bears when negative. However, using simple zero-line crossovers can result in many whipsaws.

How To Use Risk/Reward Ratio Effectively In Forex Trading

The CCI indicator made a higher low, but the price did not accompany the movement of the indicator, marking us a bullish divergence that is yet to be completely developed. This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.

A short position opens when the CCI indicator line crosses its zero level downwards. When the indicator line crosses its lower boundary downwards – it is time to open short positions. If the CCI exits the overbought zone (+100%), it is a signal to open a trade downwards. The first and most important type of signal from the indicator is, of course, the entry of the CCI line into the overbought (above +100%) or oversold (below -100%) zone.

One that is capable of forecasting emerging trends, overbought, and oversold signals. The Commodity Channel Index is a momentum oscillator that helps determine when the traded asset reaches an overbought or oversold state. Traders also use it to better assess the direction and the strength of a trend and spot reversals and extremes. The core element to comprehend the trend of the market is to monitor the value of the CCI line.

Trading with multiple timeframes provides more buy or sell signals for active traders. Traders often use the CCI on the longer-term chart to establish the dominant trend and on the shorter-term chart to isolate pullbacks and generate trade signals. Divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and CCI forms a higher low, which shows less downside momentum. A bearish divergence forms when the security records a higher high and CCI forms a lower high, which shows less upside momentum.

The Commodity Channel Index (CCI) is an indicator used in the world of financial market analysts. On the price chart, CCI is an oscillating line between the fixed levels of +100, and -100 which are the overbought and oversold zones of the market. This is a very good trend indicator so that traders can identify price trends. The Commodity Channel Index indicator is a great technical analysis tool to complement your strategy. If used correctly and in combination with other indicators, it can help form a robust trading system.

Market volatility

While this could mean holding through some small pullbacks, it may increase profits during a very strong trend. When the CCI is above +100, this means the price is well above the average price as measured by the indicator. When the indicator is below -100, the price is well below the average price. The chart above uses 30 periods in the CCI calculation; since the chart is a monthly chart, each new calculation is based on the most recent 30 months.

CCI is a versatile momentum oscillator that can be used to identify overbought/oversold levels or trend reversals. The indicator becomes overbought or oversold when it reaches a relative extreme. That extreme depends on the characteristics of the underlying security and the historical range for CCI.

  • Today we will talk about another useful oscillator – the Commodity Channel Index – CCI indicator.
  • Technically, CCI favors the bulls when positive and the bears when negative.
  • Traders will look to sell when the CCI indicates overbought conditions — entering when the indicator crosses the +100 back to the downside.
  • Donald Robert published the commodity channel index in the Commodities magazine (now Futures) in 1980.

Before getting too excited about divergences as great reversal indicators, note that divergences can be misleading in a strong trend. A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences often appear in extended downtrends. CCI is available as a SharpCharts indicator that can be placed above, below or behind the price plot of the underlying security. Placing CCI directly behind the price makes it easy to compare indicator movements with price movements.

Buy Signal

No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.

The CCI indicator is an oscillator tool that is very popular amongst investors. It can be applied in the trading of all assets such as cryptos, commodities, shares, etc. Moreover, it is an efficient technical tool that helps traders to find the overbought and oversold areas on the trading chart. It can also be used to spot the divergences where the current market trend may lose strength. In addition, to mitigate such drawbacks it is advised to combine the CCI indicator with other analytical tools for better results. The CCI is a useful indicator when day trading to determine how volatile a market is before you can get exposure intra-day.

No matter how you use the indicator, though, the essential thing is to make sure you aren’t applying uniform rules blindly without considering the CCI’s specifics. Alternatively, to avoid adopting the same approach as with other indicators. On the chart, the indicator is plotted as a line within a box, fluctuating between -100 and +100.

The CCI indicator, in contrast, presents the oversold and overbought areas earlier than the MACD. Moreover, it is used to present the deviation from the average price. Another type of oscillator that is commonly used by traders is the Stochastic Oscillator.

Also, the indicator is not a timing tool as it does not indicate at what particular point in the market you should be entering. If you want to use this indicator, backtest your strategy and optimize it for robustness before putting your money on the line. The fact that The Commodity Channel Index indicator has been in use now for over 30 years is a testament to the value placed on it within the trading central technical analysis community. Time and time again it is demonstrated how important momentum is when analyzing the market and attempting to determine future moves. Whether you are using CCI to confirm trends or to look for reversals, its momentum quantifying prowess should not go unnoticed. Like most indicators, CCI is best used not as a stand-alone indicator but in conjunction with others.