What is CCI?

CCI – Commodity channel index – is a momentum-based oscillator used to define when an asset’s price is reaching overboard or oversold territory. The oscillator was developed by Donald Lambert in 1980.

The major CCI meaning lies in identifying cyclical trends in different types of assets, not only commodities but also stocks and currency pairs. The oscillator is a popular tool used by traders to assess the direction of an asset’s price trend and its strength.

This data allows traders to decide when is the right time to enter or exit a trade, or if it is better to stay out of a particular asset for a while. The commodity channel index is designed to deliver trade signals and spot new trends, watching for overbought and oversold levels.

Commodity channel index formula

The commodity channel index is calculated by measuring the difference between the current asset’s price and the historical average price, divided by the mean deviation of the typical price. Usually, the CCI is scaled by an inverse factor of 0.015 to provide more readable numbers.

What does CCI stand for?

The CCI is often used to spot new trends and identify strength and weakness of the current trend. For example, when the commodity channel index rises from negative or zero territory to above 100, it may signal that the new uptrend is forming.

When this happens, traders wait for a pullback in price, followed by a  rally in the asset’s price and the CCI, which serves as a buying signal.

The similar principle works for spotting a newly formed downtrend. If the CCI indicator moves from positive or about zero territory to minus 100, it may indicate the start of a new downtrend. The signal could be interpreted as a time to get out of long positions and start looking for short trading opportunities.

Reading the commodity channel index you should note that the CCI above zero indicates that the current asset’s price is above its historical average. When the CCI is below zero, it indicates that the price is below the historical average.

CCI is an unbounded indicator, which means it can go as high and as low as possible. Therefore, oversold and overbought levels are defined for each asset individually by looking at its extreme CCI levels.

Using the CCI indicator you should know about divergences. This happens when the price is moving in one direction and the CCI in the other. When the asset’s price is going up and the CCI is going down, it could indicate that the trend is losing its strength. Although this is a poor trade signal, it can work as an efficient warning signal of a potential price reversal.