Before reading this lesson you should have previously read through:

The commodity channel index (CCI) is an oscillator indicator that helps show when an asset has been overbought or oversold.

The commodity channel index (CCI) helps indicate the weakening or end of a trend and a change in direction.

It helps you identify peaks or troughs in an asset's price and can indicate the weakening or end of a trend and a change in direction.

This means a you can, in theory, enter a trade right as a trend is beginning, or exit an existing trade before it moves against you.

CCI indicator is shown on charts as a moving average line

The CCI indicator is usually presented on charts using a moving average type line that smooths out the data being analysed.

The image below shows how the CCI indicator appears on charts:

CCI

The CCI is calculated to produce a reading that, for most of the time, travels in a channel between +100 and -100, as shown above.

A CCI reading above +100 can indicate that an asset has been overbought, and a reading below -100 can indicate that an asset has been oversold.

A reading above +100 can indicate that an asset has been overbought, suggesting the price may start moving down. A reading below -100 suggests that an asset has been oversold and that the price may start moving up.

Traders will look to sell when the CCI indicates overbought conditions — entering when the indicator crosses the +100 back to the downside. Conversely, they will look to buy when the CCI indicates oversold conditions — entering their trade when the indicator crosses the -100 back to the upside.

In the following image, the price crosses the +100 level, indicating overbought conditions. When it crosses back to the downside, you could look to sell.

cci 2 final
number_1 CCI is above +100
number_2 Area highlighting when the CCI reverses back below +100
es3 Short entry as the market reverses

The CCI indicator can be used on almost any time frame to determine when a trend may be changing or coming to an end.


Exercise 1: Identifying an overbought market. Show exercise
Exercise 2: Identifying an oversold market. Show exercise

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Changing the CCI indicator settings

The standard setting on the CCI indicator is 14, meaning that it will measure recent price changes against average price changes over 14 time periods. This setting can be raised or lowered depending on your preferences.

A setting of less than 14 results in a more reactive indicator, but the reading does not remain in either the +100 or -100 cycle for long. A higher setting means the CCI exceeds the +100 and -100 levels less frequently.

A setting of less than 14 results in a more reactive average that oscillates in between the +100 and -100 levels much more frequently while not remaining in either cycle for very long.

A setting of more than 14 results in a less reactive average that tends to touch or exceed the +100 and -100 levels far less frequently. When it does reach these extremes however, it tends to remain there for longer.

The two following images demonstrate the difference between a low-value and a high-value CCI setting:

cci 3

This image above shows a CCI with the setting of 4, which is much lower than the standard setting of 14. Notice how many times the average line appears above and below the +100 and -100 lines, respectively.

Now contrast that with a CCI with an extremely high setting relative to the standard 14:

cci 4

Notice here how the line moves outside the key levels only a few times and how it tends to remain at or beyond those levels for much longer.

If a setting is too low, this can result in a higher number of false signals. However, it will get you into trends sooner. A higher setting will result in fewer signals. This will help avoid false signals, but results in smaller profit potential.

When looking to change the setting it is important to bear in mind that having it set too low will result in a constantly changing reading, which can result in a higher number of false signals. When those signals are correct, however, it will get you into trends much sooner, resulting in larger profit potential.

Having the CCI set higher will result in the reading changing much less frequently. This will keep you in trades longer, helping to avoid false signals. However, your trade entry will come much later, resulting in a much smaller profit potential.

When changing the settings of the CCI it is important that you test whether your changes are actually improving or worsening the results of your strategy.

If you would like to learn how to test your strategy, then you can go to the following lesson:

Lesson
Learn how to test a strategy with the your trading journal results.
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24

Summary

In this lesson, you have learned that ...

  • … the CCI (Commodity Channel Index) is an oscillating indicator that helps you identify peaks or troughs in an asset's price.
  • … it can indicate the weakening or end of a trend, helping you enter a trade right as a trend is starting, or exit a trade before it moves against you.
  • … it is usually presented on charts using a moving average type line.
  • … it is calculated to produce a reading that typically moves in a channel between +100 and -100.
  • … a reading above +100 can indicate an asset has been overbought – this presents a selling opportunity.
  • … a reading below -100 can indicate an asset has been oversold – this presents a buying opportunity.
  • … the CCI can be used on almost any time frame.
  • … the standard setting on the CCI indicator is 14, meaning it will measure recent price changes against average price changes over 14 time periods.
  • … a setting of less than 14 results in a more reactive average that oscillates between the +100 and -100 levels more frequently and does not stay in either cycle very long.
  • … a setting of more than 14 results in a less reactive average that touches or exceeds the +100 and -100 levels less frequently, but stays there longer when it does.
  • … a setting that is too low will get traders into trends sooner but will result in a higher number of false signals.
  • … a setting that is too high will help avoid false signals but result in a smaller profit potential.
  • … when changing the CCI settings it is important that you test whether the changes are improving or worsening the results of your strategy.

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