The Commodity Channel Index (CCI) is an oscillator originally developed by Donald Lambert, The assumption behind the indicator is that commodities (or stocks or bonds) move in cycles, with highs and lows coming at periodic intervals. The indicator is similar in concept to Bollinger Bands
There are 4 steps involved in the calculation of the CCI:
- Calculate the last period’s Typical Price (TP) = (H+L+C)/3 where H = high, L = low, and C = close.
- Calculate the 20-period Simple Moving Average of the Typical Price (SMATP).
- Calculate the Mean Deviation. First, calculate the absolute value of the difference between the last period’s SMATP and the typical price for each of the past 20 periods. Add all of these absolute values together and divide by 20 to find the Mean Deviation.
- The final step is to apply the Typical Price (TP), the Simple Moving Average of the Typical Price (SMATP), the Mean Deviation and a Constant (.015) to the following formula:
How to trade with CCI
1. Range Bound Market :When Index/Stock gets stuck up in a particular Range
Go long if the CCI turns up from below -100.
Go short if the CCI turns down from above 100.
As seen from RELIANCE chart when combined with CCI.We get a prior indication from CCI when the Stock is bottoming out and when it is topping Out. As i have marked in the Chart when CCI turns down and touches -180 Stock make a low in coming few trading seesions,So CCI can be used to see stock is going to make low and capture the opportunity to initiate longs.
Similarly on Upside after CCI make a high of 200 Reliance hit the top and started its downward journey.
So we can use CCI for getting an idea when the stock is going to Top and Bottom.
To Initiate trades using CCI follow the Rule
Go long if the CCI turns up from below -100 Now again refer to the above chart CCI turned up from -100 when Reliance was trading near 975 and within 2 trading sessions we got 100 points move on reliance. So we can use to initiatetrades when CCI is turning up from -100
2. Trending Market:Looks for Divergence Both positive and negative to trade on a positional basis .
Go Long on Positive Divergence.
Go Short on Negative Divergence.
Above Chart is Self Explanatory where we can see a Negative Divergence ie. Prices are trending up but indicators are showing a downtrend .
An Chart explanation with a Positive Divergence on Nifty when CCI is applied.
But nothing should betakes for granted as a Trader we cannot rely on any one indicator and it is extremely important to Use CCI in conjunction with other indicators,Moving Averages,Support and Resistance levels so that we are not carried away by a Whip saw.
The Commodity Channel Index/CCI indicator is an extremely useful tool for traders to determine cyclical buying and selling points. Traders can utilize this tool most effectively by (a) calculating an exact time interval and (b) using it in conjunction with several other forms of technical.
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