All About Commodity Channel Index (CCI) Indicator

The Commodity Channel Index (CCI) indicator, developed by Donald Lambert, and was published in the Commodities Magazine in 1980. Though Lambert developed the CCI to identify the highs and lows in various commodities, now, CCI is applied to indices, ETFs, stocks, and all securities.

What is Commodity Channel Index (CCI)?

Commodity Channel Index (CCI) is a leading Indicator / Oscillator that helps traders to identify the expected trend of a stock.

CCI can be applied at any time frame. But while setting the time frame, please do keep in mind that the accuracy and reliability of this indicator increase when used with Higher time frames.

The CCI compares the current price level with the average price level of stock. If the current price level is higher than the average price level, then CCI will be high, and if the current price level is lower than the average price level, then CCI will be lower.

An overbought level can be identified if the current price level is too high from the average price level. Likewise, an oversold level can be identified if the current price level is too low from the average price level.

We will discuss this in detail in the examples provided below.

How to Calculate CCI?

Though the CCI Indicator is included in most of the Trading platforms these days, here is the formula to calculate CCI to understand the logic behind it:

CCI = (AvgPrice – SMA of AvgPrice) / (0.015 * Mean Deviation)

Legends:

AvgPrice = (High + Low + Close) / 3 (This is also called Typical Price or TP)

SMA of AvgPrice = Simple Moving Average of Avg Price can be calculated for n periods (n=20, 40, 50, 100,etc)

Periods = Number of chart bars to be taken into consideration for calculation SMA. Ex. 20 Period will mean SMA of 20 periods of AvgPrice.

To ensures that 70 to 80 percent of CCI values fall within the +100 to -100 range, 0.015 constant is used.

How to Read the CCI Indicator?

Here are some quick notes on CCI Indicator values, and what do they mean:

• When CCI line moves above +100 mark from below, then consider an uptrend, and look for Long entries.

• When CCI line moves above +250 mark from below, then consider an overbought stage, and look for any Pullback Short entries. Caution: When in overbought stage, the stock MAY pullback, or MAY remain in a range for some time and CCI starts coming down to the range of +100, and then again resume it’s uptrend.

• When CCI line moves below -100 mark from above, then consider a downtrend, and look for Short entries.

• When CCI line moves below -250 mark from above, then consider an oversold stage, and look for any Pullback Long entries. Caution: When in oversold stage, the stock MAY pullback, or MAY remain in a range for some time and CCI starts going up to the range of -100, and then again resume it’s downtrend.

How to Trade the CCI?

Before we dive into this section, please consider reading these points:

• I have used Daily Time frame in the examples below. But Time Frames can be set from 1 minute to 1 month, whatever you are comfortable with.

• For better accuracy and reliability of any technical indicator, higher the time frame is better.

• For the sake of the current topic, I have considered Entry / Exits / SLs in the given examples purely based on CCI Indicator. A Better practice would be to consider any Price Action pattern formation, or any other indicator to confirm your Entry / Exit / SL levels.

• In this article, I have considered only Long entry setups. But the reverse of these setups can give you Short entry setup.

CCI Indicator can provide 3 types of entries in a trade. Here they are with examples:

1. Enter Trade by CCI Indicator Value:

These types of Long trade opportunities come when CCI Indicator Line is BELOW -100 level and is trending upwards. There are 3 scenarios again in this type of setup. The first one is for traders who can take more Risk, and get an early entry into the trend, and reap higher profits. The second one is for moderate Risk-takers, where profits are still better, but a bit less than the first scenario. And the third one is with the least Risk (but still has risk), where entry is late, so profits are minimized.

• CCI Crossed Above -100

This type of trade can be taken if CCI Line has crossed above the -100 price level from below. This type of trade has a higher risk as the CCI and price may reverse after touching the -100 level. It is recommended to study the chart properly, and take double confirmation with some other technical tool.

In the Daily time frame chart of Ramco Cement, after CCI Line crossed above -100 level, Entry can be taken on the second candle that broke 1^st candle’s Close Price. Entry will be made @ 523.45. Stop Loss will be set at the previous swing low @ 453. When the CCI line crossed below the +60 price level from above, this trade will be closed @ 664. This trade is worth 140 points.

• CCI Crossed Above 0

This type of trade can be taken if CCI Line has crossed above 0 price level from below. This type of trade has moderate risk as the CCI and price may reverse after touching the 0 levels. But the probability of the price going higher is more. It is recommended to study the chart properly, and take double confirmation with some other technical tool.

This is the same Daily time frame chart of Ramco Cement as above, and only the Entry point and Stop Loss have changed based on the CCI Line Price Level moving above 0 price level.

After CCI Line crossed above 0 levels, Entry can be taken on the second candle that broke the 1^st candle’s Close Price. Entry will be made @ 553.45. Stop Loss will be set at the previous swing low @500.50. When the CCI line crossed below the +60 price level from above, this trade will be closed @ 664. This trade is worth 110 points.

• CCI Crossed Above 100

This type of trade can be taken if CCI Line has crossed above +100 price level from below. This type of trade has the least risk of reversal, but it is not Risk-free. The probability of price going higher from this level is more. It is recommended to study the chart properly, and take double confirmation with some other technical tool.

This is the same Daily time frame chart of Ramco Cement as above, and only the Entry point and Stop Loss have changed based on the CCI Line Price Level moving above +100 price level.

After CCI Line is crossed above +100 level, Entry can be taken on the second candle that broke 1^st candle’s Close Price. Entry will be made @ 610.5. Stop Loss will be set at the previous swing low @529. When the CCI line crossed below the +60 price level from above, this trade will be closed @ 664. This trade is worth 53 points.

I hope this clarifies how to take Long positions at different Price Levels of CCI Indicator.

Kindly note that 1) you can choose any time frame as per your trading setup and comfort, and 2) reverse of this Long setup will work for taking Short entries.

You can take Short entries 1) when the CCI line crosses below +100 price level (High Risk), or 2) when the CCI line crosses below 0 price level (moderate risk), and 3) when the CCI line crosses below -100 price level (least risk).

2. Catch a Trend by Bullish/Bearish Divergence

Divergence occurs on charts when Stock Price shows a trend different from the indicator/oscillator used in the trade setup. I will cover Bullish and Bearish Divergence in upcoming articles, but here is a liner about Divergence for your reference:

Bullish Divergence occurs when a stock’s price makes Lower lows, but CCI Line makes Higher Lows. This indicates that the stock’s current trend is losing strength, and stock will enter into a new Uptrend soon.

Bearish Divergence occurs when stock’s price makes Higher Highs, but CCI Line makes Lower Highs. This indicates that the stock’s current trend is losing strength, and stock will enter into a new Downtrend soon.

Here is an example of Bullish Divergence.

This is a Daily chart of ACC Ltd., where Bullish Divergence can be spotted. Stock price makes Lower Lows, but CCI Line makes Higher Lows, indicating that the Downtrend is soon to end, and stock will get into Uptrend.

Once CCI Line is crossed above the -100 level, Entry can be taken on the candle that broke 1^st candle’s Close Price. Entry can be taken @ 1046. Stop Loss will be set at the previous swing low @ 918. When the CCI line crossed below the +100 price level from above, this trade will be closed @ 1235. This trade is worth 189 points.

3. Trade an Overbought or Oversold Zone

Overbought Zones occur on charts when Stock Price moves up drastically from the average price level. Typically, the CCI Line enters above +200 or +250 zone. In this case, price either 1) tends to pull back to the average price level of CCI, and change the ongoing uptrend of the stock, or 2) price remains in a range for some time, and the CCI line comes back to +100 levels approx., and then the same old uptrend continues.

Oversold Zones occur on charts when Stock Price moves down drastically from the average price level. Typically, the CCI Line enters below the -200 or -250 zone. In this case, price either 1) tends to pull back to the average price level of CCI, and change the ongoing downtrend of the stock, or 2) price remains in a range for some time, and the CCI line comes back to -100 levels approx., and then the same old downtrend continues.

It is advised to consider any Price Action pattern formation, or any other indicator to confirm the trade.

Given below is an example of the trade from an Oversold zone. Confirmation of entry in the trade is taken after 2 green candles shadow the last red candle.

This is a Daily chart of ICICI Prudential, where the CCI Oversold zone can be spotted. CCI line touched almost -250 price level. Soon after the CCI touched -250 level, the downtrend was stalled by 2 consecutive green candles, breaking the high of the last red candle.

Entry can be taken on the candle that broke 1^st green candle’s High Price, and the current candle’s close is greater than the last red candle’s high price. Entry can be taken @ 436.25. Stop Loss will be set at the previous swing low @ 418. When the CCI line crossed below the +100 price level from above, this trade will be closed @ 536.75. This trade is worth 100 points.

Conclusion

Commodity Channel Index (CCI) indicator is an amazing Leading indicator, and I recommend making it a Must-Have in your Trading Setup. It helps traders to gauge the market strength and the direction well in advance.

But since the CCI indicator is unbounded in nature, so it becomes difficult at times to ensure whether +200/-200 or +250/-250 price levels are genuine Overbought or Oversold zones or not, and shall we expect a reversal from this point, or a range. So additional technical tools, like Price Action patterns, Volume Analysis, or other Technical indicator is always recommended to cross-check the signal given by the CCI indicator.

CCI Indicator, if used as a Leading Oscillator tool in a given trading setup, can do wonders for sure.

Guys do check out my Watchlist creation and Day Trading Risk Management articles if you are looking for such topics. I would recommend the Day Trading Risk Management article as a Must-Read and Must Follow article.

Will get back soon with a more interesting article related to Stock Market, Day Trading, and Finance.

May the GODS OF TRADE be with you… 🙂

Ciao…