The Commodity Channel Index (CCI) is a technical indicator developed by Donald Lambert in 1980. It is widely used in various markets, including stocks, commodities, and currencies. The CCI measures the strength of a trend by comparing the average price range to a predetermined value.
How CCI Works
The CCI formula involves two main components: the average true range (ATR) and the number of periods (n). The ATR is calculated as the difference between the highest and lowest prices for a given period, while the AT R is multiplied by 0.015. The CCI value ranges from -100 to +100. A reading above 100 indicates overbought conditions, whereas a reading below -100 indicates oversold conditions.
Using CCI in Trading Strategies
The CCI can be used as a standalone indicator or combined with other technical indicators to create trading strategies. When the CCI falls below -200, it may indicate an uptrend reversal. Conversely, when the CCI rises above +200, it may signal a downtrend reversal.
Advantages of CCI
The CCI has several advantages over other technical indicators:
- It can be used on various time frames, including short-term and long-term charts.
- It is less sensitive to price manipulation than other indicators.
- It provides a clear signal for trend reversals.
Limitations of CCI
The CCI has some limitations:
- It does not account for the impact of news events or economic data on prices.
- It can be affected by order flow and market sentiment.