✔️ Information reviewed and updated in December 2023 by Eduardo López
We know that there are different types of indicators such as the CCI that can help us develop complete trading strategies in order to operate in the different markets. So today we want to share with you a fundamental indicator that you should consider if you want to identify trends in the market.
Don't waste any more time and keep reading about one of the most used oscillators in technical analysis.
✨ What is the CCI? ✨
The Commodity Channel Index (CCI) is a versatile indicator that is often used when trying to identify new trends in the market, as well as helping to warn about extreme conditions. Donald Lambert developed the CCI to be able to identify the twists or cyclical changes in the price of commodities, however, This oscillator can be implemented within the analysis of stock indices, currency pairs, stocks and other financial assets.
In a general way, we can determine that the indicator measures the current price level in relation to an average price level during a designated period of time.
✨ How is the CCI calculated? ✨
We will exemplify a case to be able to explain the calculation that we have to do to obtain it, let's imagine that we have to extract it to analyze 20 periods (standard value normally implemented in the calculation of the indicator), the formula that we will use would be:
CCI = (Typical Price - 20-period Simple Moving Average of Typical Price) / (0.015 x Average Deviation)
The considerations are:
Typical Price (TP) = (Maximum Price + Minimum Price + Closing Price) / 3
Constant = 0.015
The Mean Deviation can be obtained through four different steps:
- The average of the typical price of the 20 most recent periods is subtracted from the typical price of each period.
- The absolute value of such numbers is calculated.
- The absolute values are added.
- The total is divided by the number of periods.
Lambert established a constant of 0.015 in order to ensure that approximately 70 to 80 percent of the CCI values can be between - 100 and + 100. We must not forget that this percentage depends to a large extent on the retroactive analysis period, which refers to the analysis period that will be carried out in the past.
✨5 reasons why you should implement it✨
- The CCI is known as a momentum indicator thanks to its versatility to be able to identify possible modifications or changes in overbought and oversold trends.
- This indicator usually enters the overbought or oversold zone when it reaches a relative extreme value. Which usually depend on the characteristics of the financial asset that is being studied.
- When there is a change in trends, they can be identified when the CCI crosses the specific threshold between zero and 100.
- No matter how you use it, loExperts should always implement it in conjunction with other market analysis tools.
- The On Balance Volume (OBV) indicator or the Accumulation / Distribution Line can add value to the signals generated by the CCI.