Commodity Channel Index CCI Indicator Explained Best

What is the Commodity Channel Index CCI Indicator?

The Commodity Channel Index CCI indicator measures the current price level relative to an average price level over a given period of time.

CCI is relatively high when prices are well above their average and relatively low when prices are well below their average. As such, the CCI indicator can be used to identify overbought and oversold levels, as well as potential trend changes.

In the original creation of the CCI indicator, Lambert originally recommended a 14-period CCI, but the indicator can actually be used with any time frame. A common setting for day trading is a 20-period CCI. For longer-term trades, Lambert recommended using longer time periods, such as 50 or 100 to smooth out trends.

The CCI Indicator Is A Trend Following Technical Analysis Tool

Whilst the CCI commodity channel index indicator can be used in a number of ways, Lambert originally intended for the indicator be used as a trend-following tool.

How Do Traders Use the Commodity Channel Index CCI Indicator For Trends?

The commodity channel index is a momentum-based technical indicator and CCI can be used to identify potential trend reversals. Reversals in technical trading represents big opportunities.

This indicator measures the current price level relative to an average price level over a given period of time with the CCI calculation done using the following formula:

CCI formula = (Typical Price – 20-period SMA of TP) / (.015 x Mean Deviation)

Key for above :
– Typical Price (TP) = (High + Low + Close)/3.
– 20-period Simple Moving Average (SMA) of TP
– Mean Deviation = Average of the absolute difference between TP and 20-period SMA of TP, over the specified period

The CCI indicator is typically plotted as a line on a stock chart and ranges from +100 to -100. A CCI chart reading above +100 indicates that prices are well above the average price, while a reading below -100 indicates that prices are well below the average price. You can see a CCI chart representation below, with the lower area the CCI indicator, and the top the instrument chart.

CCI chart representation
CCI chart representation

Traders often look for divergences between CCI and price action as potential trading signals. A bullish divergence occurs when price action makes a new low but CCI fails to make a new low. This can be seen as a potential sign that prices are about to move higher. Conversely, a bearish divergence occurs when price action makes a new high but CCI fails to make a new high. This can be seen as a potential sign that prices are about to move lower.

CCI can also be used to identify overbought and oversold conditions. Traders will often look for readings above +100 as potential signs that prices are becoming overextended and may soon start to fall back towards the average price level. Similarly, readings below -100 may be viewed as potential signs that prices are becoming oversold and could start to move higher.

The CCI indicator can be used in a number of different ways, but one of the most popular is to look for divergences between CCI and price action as potential trade signals.

When looking at the CCI indicator, pay attention to the following:

  • The direction of the CCI line
  • The level of the CCI line
  • Whether the CCI line is rising, falling, or flat
  • Whether the CCI line is diverging from price action or converging with price action

CCI can be a helpful addition to your technical analysis toolkit, but remember that no indicator is perfect. especially on their own. Always use CCI indicators in conjunction with other technical indicators and analysis tools, and be sure to back-test your trading ideas before implementing CCI strategies in live markets.

Simple Commodity Channel Index Strategy For Beginners

A great commodity channel index strategy for beginners is to first start by looking at the overall trend of the market. If you do not yet know how to evaluate charts for longer term trends, feel free to take a look at our how to trade section which breaks down many introductory topics.

commodity channel index strategy in downward trending market
Downward trending market, chart provided by TradingView

If the market is in an uptrend, you will want to look for buy signals when the CCI crosses above 100. If the market is in a downtrend, you will want to look for sell signals when the CCI moves below -100.

One of the most common ways to use the CCI indicator is to look for overbought and oversold levels or conditions. When the CCI moves and is above 100, it is said to be overbought, and when it is below -100, it is said to be oversold. These are both potential reversal areas and a useful way in which the commodity channel index can be used.

You will want to look for price action signals like candlestick patterns or divergence to confirm your entries.

Another simple way to use the Commodity channel index in trading is to look for divergences.

Divergence is when the CCI is moving in the opposite direction of price, and can be a potential sign that the current trend is losing momentum. When the CCI moves in this way, it could be that a reversal in trend may be imminent.

By combining these two simple commodity channel index strategies, you can develop a robust system that can help you to make consistent profits in the markets. Again, always remember to test any CCI strategy before using it live, and always use risk management tools like stop-losses to protect your capital.

Potential Pitfalls of CCI Indicator Strategies

The CCI indicator can be a helpful tool for traders, but there are also potential pitfalls to be aware of. Here are a few things to keep in mind when using this indicator:

  • The commodity channel CCI Indicator can produce false signals. This means that the indicator may give a buy or sell signal even though the underlying market conditions don’t warrant it.
  • CCI Indicator can be slow to respond to changes in market conditions. This means that by the time the signal is generated, the market may have already moved on.
  • This is an indicator that can be susceptible to whipsaws. This means that the CCI indicator may give a false signal in response to market fluctuations which may already have taken place, leading to losses if acting on the signal without verification.

Overall, the CCI indicator can be a helpful tool for traders, but it’s important to be aware of its potential drawbacks.

Use this indicator in conjunction with other technical indicators, moving averages, and analysis, to get the most accurate picture of the market.

The History Behind The Commodity Channel Index CCI Indicator

The CCI commodity channel index indicator was invented by Donald Lambert in 1980, some 40+ years ago and is still going strong today. Having been born in 1939, and with a wealth of experience in technical analysis; Donald Lambert created the CCI indicator well into his career.

As a profession, Lambert was a technical analyst and commodities trader who worked for Commodities Corporation, a now-defunct commodities trading firm. He also wrote articles for futures magazines and devised the CCI indicator with the intent of identifying cyclical turns in commodities.

Although this was the first indicator named commodity channel index, it was not the last; as there is now another popular form of CCI indicator, called the Woodies CCI Indicator.

Woodies CCI Indicator Explanation & Chart

Woodies CCI chart
Visual representation of the Woodies CCI on a chart

Although the original CCI indicator was created by Donald Lambert, that does not mean it is the only variant, or even the most popular today.

The Woodies CCI Indicator is an adaption from the mind of esteemed trader Ken Wood in the late 1980s. Having begun his career as a floor trader on the Chicago Board of Options Exchange (CBOE) in 1983, Wood left In 1985, to become a full-time options market maker on the trading floor of the Chicago Mercantile Exchange (CME).

That provided ample background into the inner workings of the markets and he traded there until 2001 when he retired from active trading to pursue other interests and founded the Woodies CCI Indicator Club.

What is the Woodies CCI Indicator And How Does The Formula Differ?

The Woodies CCI indicator is a modified version of the original commodity channel index indicator, with the main difference being the formula and the number of CCIs you see. The preset periods of CCIs within the Woodies CCI are at 6, and 14.

This makes the Woodies CCI appear as more of an oscillator, with one faster curve used to identify potential movement in the slower curve.

The Woodies CCI formula then would be twice the original CCI indicator, but with altered periods and look something like the below with both visible:

Woodies CCI formula fast line = ((typical price – 6-period SMA of typical price) / (0.015 x mean deviation))
Woodies CCI formula slow line = ((typical price – 14-period SMA of typical price) / (0.015 x mean deviation))

Typical price is the arithmetic mean of the high, low and close price for a given period, and mean deviation is the x-period average of the absolute value of the difference between the typical price and the x-period simple moving average (SMA) of typical price.
Woodies CCI indicator vs original CCI on chart
Woodies CCI indicator in the middle, actual chart on top, and original ‘Lambert’ CCI at the bottom in blue

As you can see, the Woodies CCI indicator appears on a chart quite differently to the original CCI. Certain traders prefer one over the other but that is a matter of personal preference and strategy. Additionally, it is worth noting that the Woodies commodities channel index indicator is typically used with a shorter time frame than the original CCI indicator with both simple moving averages being below 20.

CCI Indicator FAQs

Is CCI A Leading Indicator?

The commodity channel index (CCI) is a momentum oscillator that can be used to identify overbought and oversold conditions in the markets.

CCI is more officially thought of as a lagging indicator. While CCI and other lagging indicators are not leading indicators, they can provide some insight into future market movements from momentum.

What does the abbreviation CCI stand for?

This abbreviation CCI in trading indicator terms refers to Commodity Channel Index CCI.

*This is not to be mistaken with CCI in crypto which is the Crypto Council for Innovation .

Which is better, CCI or RSI?

There is no easy answer to this question as it depends on a number of factors, including a trader’s goals and objectives, risk tolerance, and the markets being traded.

If this is something that you are curious about, the best suggestion would be to test both in a demo account or paper trading environment and see which one you prefer. As always, if in doubt, test.