The formula creates an oscillator that will move above and below the zero line.
The zero line is the point where price crosses its moving average. 70 to 80 percent
of price action will trade between -100 and +100.The Commodity Channel Index can
be used to identify price reversals, price extremes and trend changes. Like many
oscillators, the CCI can be used to detect divergences from price trends to signal
change in price trends. Some traders use the CCI similarly to Bollinger Bands where
they draw patterns on indicator to confirm signals.
Original trading Rules
One of Lambert's initial trading strategies for the CCI focused on movements above
+100 and below -100. In his analysis, Lambert observed that about 70 to 80 percent
of the CCI values where between +100 and -100. So by focusing on breaks above +100
and below -100, a buy or sell signal will be in force only 20 to 30 percent of the
time. When the CCI line moves above +100, a strong uptrend is identified and a buy
signal is given. The trade is closed when the CCI line moves back below +100. When
the CCI line moves below -100, a strong down trend is identified and a sell signal
is given. The trade is closed when the CCI line moves back above -100.
While this strategy is simple to use, it tends to produce too many signals with
little profits. Many times the CCI produces premature signals and traders find themselves
on losing trades only to be stopped out at the top or bottom. One way to combat
early signals is with the use of trend lines so that price action will confirm a
change in direction of the trend.
Overbought and Oversold
Many traders use the Commodity Channel Index to identify extreme levels. Readings
above +200 are considered to be overbought and readings below -200 are considered
oversold. When the CCI is between -50 and +50 the trading conditions are considered
neutral. As with other oscillators when prices reach extreme overbought or oversold
conditions, there is a large probability that the prices will revert to normal trading
The zero line will often be areas of support or resistance on the CCI line. Many
traders watch price action that follows when the CCI break the zero line that has
been support and resistance. The Zero line also provides a good reference to
identify points of the chart where to draw trend lines. Breaks of these trend lines
can be used to generate buy or sell signals.
As with most oscillators, the divergence of prices and indicators typically provide
good signals to changes in trend direction. A lower peak in the Commodity Channel
Index against higher highs in price is negative divergence and is a sell signal.
A higher peak in the CCI against lower lows in price is positive divergence and
is a buy signal.
The CCI is a valuable tool to identify potential peaks and valleys in price action,
and thus provide investors and traders with strong signals to profit in changes
in the direction of price movement of the stocks, bonds, forex and commodities.