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How to Use the Commodity Channel Index (CCI) Indicator – Trading Strategy

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commodity channel index, cci, trading

The Commodity Channel Index (CCI) is a technical analysis indicator that measures the difference between the typical price level of an asset to the average price level over a predetermined time frame. Traders use it to identify overbought and oversold areas and find trading signals.

KEY POINTS
  • The CCI is a popular technical indicator used by traders to identify buy and sell signals.
  • When using the basic CCI indicator strategy – A buy signal is generated when the price breaks above +100, and a sell signal is generated when the price falls below -100.
  • Traders also use the zero line to identify a shift in trend momentum.
  • In addition, the CCI can be used to identify overbought and oversold price levels.

In this guide, we are going to cover everything you need to know about the CCI indicator, including how to use the indicator and implement the CCI trading strategy.

What is the Commodity Channel Index (CCI) Indicator, and How Does It Work?

The Commodity channel index (CCI) is a momentum oscillating indicator that primarily helps traders identify overbought and oversold areas. However, it can also be used to identify strong trend momentum and assist traders in finding crucial price levels to join an existing trend. 

The CCI indicator was developed by Donald Lambert and was first introduced in his book “Commodity Channel Index: Tools for Trading Cyclical Trends”. Over the years, the CCI indicator has become among the most widely used technical analysis tools to find buy and sell signals, particularly for scalpers and day traders

Much like the RSI and MACD, the Commodity Channel Index is displayed as a sub-chart, meaning it is an extra chart below the main price chart. As the CCI indicator is very popular, it is often available on nearly every trading platform.

Once you learn how to add indicators to your chosen trading platform, you can navigate to the indicators menu, and you are likely to find it there. Whenever you add the CCI indicator, a new sub-chart opens up with default settings, usually 14 or 20. However, some traders prefer a higher period as it increases the probability and accuracy of the CCI indicator.  

Also, in default settings, the CCI indicator generally has three values: 0, -100, and +100. The asset is overbought when the price reaches +100 and oversold when it reaches -100. However, the exact value at which the price is overbought or oversold is open to interpretation. From my experience, the CCI indicator works best with -200 and +200 as a signal for trend reversal.

CCI Indicator

As you can see in the image above, the CCI indicator indeed, most of the time, stays inside a range between -100 to +100. Yet, it does not mean that these areas should indicate that a reversal is likely to occur. Instead, very often, traders use the breakout below or above the 100 value to join an existing trend and exit a position at around 150 to 200. That is, in many opinions, the ideal trading strategy for using the CCI indicator.

How to Use the Commodity Channel Index (CCI) Indicator in Trading

The primary issue revolving around the CCI indicator is how to use it. In other words, there are different opinions on how traders should use it correctly. 

At its core, the CCI works similarly to the Relative Strength Index (RSI), providing signals for overbought or oversold conditions. Yet, the CCI is a more flexible and somewhat vague indicator, and there are various techniques and methods to use it. 

But let’s start from the beginning and go through the process of using the CCI indicator.

The first thing you need to do is to add the indicator to a price chart on your trading platform. As we previously mentioned, that should not be a problem as the CCI indicator is available on nearly every platform in the market (in the next section, we’ll show you how to add the CCI indicator to a price chart). So, for example, if using TradingView, you can simply navigate to the indicators, type in CCI, and add the indicator to the chart. 

Then, once the indicator has been added to your price chart, you can analyze the market price movement based on the CCI signals. The following are the primary methods to use the indicator for the Commodity Channel Index.

Buy and Sell Signals to Join an Existing Trend

Even though the CCI indicator is known as an indicator for identifying oversold and overbought price levels, many traders use it to determine the strength or weakness of an existing trend, and thus, find trading signals to enter an existing trend.

Remember, when there is strong buying or selling pressure, it does not necessarily mean the trend is likely to reverse. Instead, when you learn to recognize a trending market, you can use the CCI indicator to find the right entry-level to join an existing trend. 

For instance, some traders enter a trade when the CCI indicator breaks above +100 or below -100 and exit the trade when it reaches somewhere between values of 150-200.

Identify Overbought and Oversold Price Levels

The CCI indicator is primarily known as a tool to identify overbought and oversold price levels. Whether you decide to use 100, 150, or 200 as a level for a trend reversal indicator, the CCI can help traders find levels where the price may reach the limit of an existing trend and reverse.

CCI overbought and oversold

Yet, using the CCI to identify overbought and oversold areas can be quite challenging. This is mainly because the CCI is an unbound oscillator indicator, meaning there are no upside or downside limits. Theoretically, the values can reach 300 and even 400. So, the CCI values are somehow confusing and their values can vary on different assets. For that matter, traders that use the CCI typically look for the CCI’s historical performance (over the chosen period) to get a better indication of where the price might reverse.

CCI Divergence

Divergence is another way to use the CCI indicator to find trading signals. For those unfamiliar with the term, divergence in trading is a situation of miscorrelation between the price of an asset and the indicator. Much like MACD divergence and RSI divergence, traders exploit this occurrence when they notice the CCI indicator and the price of the asset move in opposite directions.

Zero Crossover

Finally, another way to use the Commodity Channel Index indicator is to follow the zero line. Technically, the CCI zero line presents the historical average price (also known as the typical price) over the selected time frame. So, When the CCI value is above zero, the asset’s price is above the historical average. On the other hand, when the CCI value is below zero, the asset’s price is below the historical average.

Therefore, many traders use this technique to find trading opportunities. They enter a long buying position when the price breaks above the zero line as they interpret it as a signal for bullish momentum, and short-sell when the price falls below the zero line as the indicator signals a bearish momentum is building up.

Commodity Channel Index Indicator (CCI) Trading Strategy Tutorial

By now, you pretty much know what the commodity channel index is and how to use it. So, let’s move on to the next step and learn how to trade financial instruments using the CCI indicator.

Step 1: Add the Indicator

First, you must add the indicator to the price chart. Fortunately, the process is straightforward and works similarly on any trading platform. You need to navigate to the indicators menu and find the CCI indicator by typing in CCI or scrolling down until you find the indicator.

Add CCI indicator

Step 2: Find Buy and Sell Signals and Enter a Trade

Now, the fun part begins. As we mentioned above, there are several ways to use the CCI indicator to find trading signals. But, obviously, you don’t want to limit yourself to just one method. In trading – whatever comes, you should take it. 

Also, it is best to use another indicator in combination with the CCI indicator. In the example below, we’ve added a 20-moving average. As a trading strategy, we look for the more reliable method to use the CCI – that is, to buy when the indicator breaks above 100 and sell when it falls below -100.

Trading Strategy CCI Indicator

As you can see, the CCI provides accurate trading signals. Every time the indicator breaks above +100, the uptrend momentum begins, and vice versa. In addition, the simple moving average indicator is used as another confluence trading tool to confirm the signal. 

And this is how the CCI indicator works. It is a momentum indicator that can help you find trading opportunities.

Step 3: Place s Stop Loss and Take Profit Target

At last, you must set a stop loss and take profit targets. Remember that entering a trade is just part of the process, and getting out of it is often the most difficult aspect of trading. 

Unfortunately, one of the disadvantages of the CCI indicator is that the way one should be exiting a position is open to interpretation. Some traders use the zero line crossover as a signal for a shift in momentum, while others exit a position when the indicator breaks above or below the opposite value. 

From my experience, the best way to find the ideal SL and TP with the CCI indicator is to use the zero line crossover for short-term trades and the opposite value for long-term trades. 

Using the same example as before, you can see how the CCI indicator provides two exit level signals – the first sell signal is generated when the indicator hovers around the zero line, and the second is when it falls below the -100. Ironically, it is the same price level. However, as seen in the chart, when the first signal appears, the price trend pauses before it continues upwards. 

So, when using the CCI indicator, there’s no one way to identify exit levels. It is, therefore, best to analyze the indicator’s past reading and determine whether it should be around the zero line or the opposite value (i.e., +100 or -100).

CCI indicator sl and tp

Commodity Channel Index (CCI) Indicator – Pros and Cons

Let’s quickly review the benefits and limitations of using the CCI indicator.

Benefits of Using CCI Indicator

There are many benefits to using the CCI indicator. It is relatively easy to interpret, appears as a sub-chart, and can be used as a reliable extra indicator to find trading signals. Like all indicators, it provides predictions or signals and should be used accordingly. It is also very flexible in terms of the settings and parameters a trader can choose. 

All in all, the CCI indicator can undoubtedly help you find accurate trading signals. It is an excellent supportive indicator that can help improve your trading performance. You’ll have to learn how to use it properly, set the correct settings for the instrument you are trading on, and combine it with other technical indicators. Additionally, you can use the CCI indicator in various ways – to identify a buy or sell signal when it breaks the 100 value, identify overbought and oversold conditions when it reaches above 200, use the zero line crossover, and the CCI divergence strategy.

Pros

  • Commodity Channel Index is considered as a reliable and accurate indicator
  • The CCI is displayed as a sub-chart and can be used as a supportive indicator
  • It can help traders identify trend continuation and reversals
  • It is relatively easy to understand how to use the CCI indicator

Limitations of CCI Indicator

Even though the CCI indicator is an excellent trading tool, it certainly has some limitations. At first, the CCI is a lagging indicator, which means that in some cases, it may provide false signals. Then, the CCI is an unbound indicator, which can be pretty confusing to analyze the market using it. This makes the use of the CCI indicator subjective and should involve a trial and error process before you can effectively use it. 

Therefore, as the CCI primarily measures the strength or weakness of a trend, traders must find the correct value at which the price tends to continue its existing trend or reverse. That could be a significant challenge in trading assets with the CCI indicator. However, once you find that value, the CCI could be an extremely useful tool.

Cons

  • Identifying overbought and oversold price levels can be pretty tricky and misleading when using the CCI indicator
  • May generate false signals
  • As the CCI is an unbound oscillator indicator, it requires a reading of the asset’s past performance to identify overbought and oversold levels
  • The CCI indicator does not provide precise exit levels

Key Takeaways

Key Takeaways
  1. The commodity channel index is a momentum oscillator indicator that measures the ratio between the current price of an asset and its average historical price over a specific time frame.
  2. Traders use several methods to extract CCI trading signals – overbought and oversold price levels, entering an existing trend when the price reaches the +100 or -100 value, CCI divergence, and zero value crossover.
  3. It is best to use another technical analysis to confirm CCI signals. Such tools include moving averages, Fibonacci support and resistance levels, RSI, MACD, and the Stochastic Oscillator.
  4. Stop loss and take profit target should be placed at the zero line crossover or once the CCI breaks in the opposite direction (for example, from +100 to -100).

Frequently Asked Questions (FAQs)

Here are some of the most common questions about the Commodity Channel Index (CCI) indicator:

What are the best settings for the CCI indicator?

Well, different people will tell you different things. Technically, a higher period gives you a higher probability of CCI values ranging between -100 to +100. Therefore, scalp and day traders typically use 14 as a default setting, while swing and position traders use 20 or higher as a time frame. 

Which indicator works best with the CCI indicator?

Many indicators can be used in combination with the CCI indicator. Those include Pivot points, Fibonacci levels, and even RSI. However, one favorite strategy among traders is to use a simple or exponential moving average in combination with the CCI indicator.

How do professional traders use the CCI indicator?

Most professional traders are usually short-term traders. As such, they typically search for minor trends in the market and use the CCI to identify a trend in the market rather than a reversal. To do so, they buy the asset when it rises above +100 and sell when it falls below -100. 

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Risk Disclosure: The information provided in this article is not intended to give financial advice, recommend investments, guarantee profits, or shield you from losses. Our content is only for informational purposes and to help you understand the risks and complexity of these markets by providing objective analysis. Before trading, carefully consider your experience, financial goals, and risk tolerance. Trading involves significant potential for financial loss and isn't suitable for everyone.

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