The CCI indicator is known as the Commodity Channel Index and this is an indicator that is developed by Donald Lambert.
I will not bother you with the calculation of this indicator because your trading platform can automatically help you to calculate and plot out the indicator. What I am going to share with you today is what exactly this indicator can do for you and how you can integrate it to your trading plan.
For this CCI indicator, it will come with +100 and -100 levels. Most of the time, this indicator will move in between the +100 and -100 levels and it will exceed the levels for about 20 to 25% of the time.
Here is what you can use the CCI for:
1) As a buy and sell signal – Whenever you see the CCI moving above the +100 level, you are in fact in a period of strong uptrend and this is the time you can enter a LONG trade. Once the CCI moves back to the +100 level, you should then exit your trade.
However when you see the CCI moving below the -100 level, you are in a strong downtrend period and you can enter a SHORT trade. Similar to the above LONG trade, you should exit your trade once the CCI move up to the -100 level.
From the picture above, you can see that the market move higher when CCI reaches the +100 level and vice verse.
2) As a reversal identifier – There are basically 3 ways you can make use of the CCI indicator to identify reversal and I am going to go through one by one in detail.
a) Trend Line Break: You can make use of the CCI to draw trend line and once you see the trend line being breached, you are going to see the market moving in the direction of the breakout.
b) CCI Divergence: Similar to MACD divergence, the CCI also produces positive and negative divergences. When you see the market making higher highs while the CCI making lower highs, you are in fact seeing a negative divergence. This is usually a signal that the market is going to move down but the time it takes for the down move may vary and you should not assume that it is coming in the next few candles.
If you see the price making lower lows while the CCI making higher lows, it is a sign of positive divergence and the market is going to produce an upward movement soon. Similarly, you should not assume that it is going to happen very soon.
c) Overbought & Oversold: Similar to the Stochastic and the Relative Strength Index, the CCI can be used as an oscillator. When you see this indicator moving above the +200 level, you are in an overbought zone and you can place a SHORT trade when you see the CCI crossing below the +100 level.
When you see the indicator moving below the -200 level, you are in an oversold zone and you can then place a LONG trade once you see the indicator moving above the -100 level.
However there is nothing that works 100% of the time and below is one such example
The CCI indicator has been a great help to my trading so far and it can be integrated into various type of trading methods due to its multi-features. You can try this indicator out in your trading chart and see how it performs for you