✔️ Information reviewed and updated in December 2023 by Eduardo López
Technical indicators such as CCI are one of the fundamental tools when conducting stock market analysis, since they allow us to study the future evolution of the prices of a financial asset. With this we can better interpret if the prices of an asset are in an overbought or oversold situation, and this in order to make a better decision when investing.
Next, you will learn more about one of the most versatile indicators when it comes to identifying new trends. Become an expert by implementing analysis tools to be able to make more accurate and effective decisions.
What is the CCI?
Donald Lambert was in charge of developing the Commodity Channel Index (CCI) which is a popular indicator used to identify new trends in the market. or warn about possible extreme conditions. Lambert originally developed this indicator to identify certain turns or cyclical changes in commodity prices, however, it can also be applied in the analysis of stock indices such as currency pairs, stocks and other financial assets.
In summary, the CCI is in charge of measuring the current price level according to the average price level during a certain period of time.. This indicator is relatively high when prices in the market are well above their average and it is relatively low when prices are well below their average. So the CCI can be implemented to identify overbought and oversold conditions.
How is it calculated?
Normally, to exemplify the formula, 20 periods are usually used as the standard value, however, you can use any other. The number of CCI periods is also used to calculate the simple moving average and the Average Deviation.
The formula is:
CCI = (Typical price - Simple moving average of 20 periods of the typical price) / (0.015 x Average Deviation)
Typical Price (TP) = (Minimum Price + Closing Price) / 3
Constant = 0.015
In order to calculate the Average Deviation you can follow the following four steps:
- Obtain the average of the typical price of the 20 most recent periods of the typical price according to each period.
- Calculate the absolute value of such numbers.
- Add the absolute values.
- Divide the total by the number of periods.
Why should you use this indicator?
- The CCI is considered an incredibly versatile momentum indicator, which can be used to identify potential trend reversals or overbought and oversold conditions.
- The indicator may enter an overbought or oversold zone when it reaches a relative extreme value. Which often depend on the characteristics of the financial asset that is being analyzed.
- Regardless of how the CCI is used, experts should use it in conjunction with other indicators and market analysis tools.
- Other oscillators such as the OBV or Accumulation / Distribution Line can add value to the signals that are generated as a result of the CCI.
- When the CCI crosses the threshold between 0 and 100, trend changes can be identified.