What Is Commodity Channel Index (CCI)?

The Commodity Channel Index (CCI) is a versatile technical indicator developed by Donald Lambert in 1980. The CCI indicator can be used to identify new trends and measure the variation of a security from its mean price.

The CCI indicator is used to track market movements, that may indicate buying or selling. Using the moving average set by the trader, it can suggest entry points.The CCI indicator strategy may be used in combination with other oscillators to generate signals to estimate the changes in the direction of the price movement of the stock/security.

CCI Indicator

The Commodity Channel Index or CCI indicator shows when the price of the stock/security is above or below the moving average, which is set beforehand by the trader.

If the price deviation is strong in the short term in relation to its average value, the higher or lower the oscillator line will go from the zero point. If the line goes higher, there will be an uptrend, and if the line goes lower, there will be a downtrend.

Usually, the CCI indicator will oscillate between the +100 to -100 levels. But when the line steps outside this range, the traders will get a signal that the stock/security is being overbought or oversold.

How to Calculate CCI using Formula?

To calculate the CCI indicator, we use the following formula:

CCI = (Typical Price – 14-SMA)/ (0.015*Mean Deviation) 

In this formula

  • The Typical Price is (L+H+C)/3
  • SMA is a regular moving average line plotted by typical prices within a given period
  • The Mean Deviation is the average deviation of the 20-period average of typical price
  • 0.015 is an experimentally determined constant in order to keep CCI between 100 and -100

Why Use CCI Trading Strategy?

Using the CCI trading strategy, one can make use of the CCI indicator, which is considered fairly reliable and effective.

The indicator is ideal for the identification of market entry points, especially when combined with other indicators.

In toto, the CCI trading strategy can prove to be effective for trading when the CCI indicator is used with other indicators. 

How to Use CCI Trading Strategies?

The CCI compares the current price to an average price over a period of time. The indicator fluctuates above or below zero, moving into positive or negative territory. While most values, approximately 75%, fall between -100 and +100, about 25% of the values fall outside this range

Bullish Scenario

  • When the CCI is above +100, this means the price is well above the average price.This indicates that that there is an prevailing uptrend , hence we can go long when the indicator crosses above 100

Bearish Scenario

  • When the CCI is below -100, this means the price is well below the average price. This indicates that there is a prevailing downtrend, hence we can go short when the indicator crosses below -100.

Building CCI Strategy on Mudrex

You can create strategies on Mudrex using simple ‘blocks’. You can connect multiple blocks and define conditions on those connections or ‘paths’ to create your strategy on Mudrex.

As discussed above, lets first write our entry/exit conditions so that we know what to do:

When the CCI is above +100, this means the price is well above the average price. This indicates that there is a prevailing uptrend, hence we can go long when the indicator crosses above 100

BUY: When CCI crosses up +100

When the CCI is below 0, it indicates that the uptrend has exhausted. Hence we can go long when the indicator crosses below 0.

SELL: When CCI crosses below 0.

Final Strategy: The final strategy on Mudrex looks like this

Testing

We can now run a quick back-test to see how our strategy performs.

Improvements:

A multiple time frame trading strategy can be created using CCI. An uptrend is indicated if the price is above +100 in the long-term chart and is maintained until the CCI of the long-term chart dips below 0, while one can buy when the shorter-term CCI dips below -100 and then rallies back above -100. The vice versa will give out the downtrend and the sell signals as well.


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