Share Market Technical Analysis @ NCFM Academy Hyderabad

Commodity Channel Index ( CCI ) Simplified

The Commodity Channel Index or CCI Indicator is one of the many technical analysis indicators that I used for my trading endeavors.

It is developed by Donald Lambert and although termed as the Commodity Channel Index, it is not just limited to the Commodities market, many have used it effectively in other financial instruments including Forex Trading.

It is one of those technical analysis indicators that has slowly gained popularity once you know how to effectively use it.

In a nutshell, this trading indicator measures the variation of price from its statistical mean.

High CCI values indicate that prices are unusually high compared to average prices whereas low values show that prices are unusually low.

Calculation :

CCI calculates the distance between a price and its average over x days divided by 1.5% of the standard deviation.CCI=(M-MM)/(0.015*D)
M=(H+L+C)/3
MM=moving average on M with n days
H: high
L: low
C:close
D: standard deviation on the moving average.

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Interpretation:

Basically, the CCI acts as a speedometer of the market which gives indications of a wide array of buy and sells signals.

Technically speaking, there are 3 ways to use the CCI, namely through price divergences, trend line breaks, and as an overbought/oversold indicator.

Price Divergences

A price divergence occurs when prices are making new highs while the CCI is failing to surpass its previous highs or when prices are making new lows while the CCI is failing to surpass its previous lows.

These typical price divergences are usually followed by a correction in price, resulting in an opportunity to trade.

Over-Bought / Over-Sold Levels

The CCI typically oscillates between +100 and -100. To use the CCI as an overbought/oversold indicator, readings above +100 imply an overbought condition (and a pending price correction) while readings below -100 imply an oversold condition (and a pending rally).

Trend Line Breaks

The breaking of trend lines can also be used to generate trading signals as well. Trend lines can be drawn connecting the peaks and troughs of the CCI.

From oversold levels, a CCI advance above -100 and trend line breakout could be considered bullish.

From overbought levels, a CCI decline below +100 and a trend line break could be considered bearish.

I hope this simplified explanation of the CCI Indicator can give you a head start of how useful this trading indicator for Share Market Technical Analysis can be.