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4. The result is scaled using a reduction factor of
The reduction factor is also called the “Lambert constant”. Its value is constant and is designed to fit 2/3 of the absolute deviation values in the interval [, ].
Finally, the CCI formula looks like this:
Look at the EURUSD price chart, the timeframe is M5. Numbers mark strong overbought and oversold levels of + and An entry signal is still a Price Action pattern.
In the first case, the CCI indicator reached level +, and there is a Pinbar in the price chart. A sell trade is entered.
In the second case, the CCI indicator reaches level - , and there is a Bullish Engulfing pattern in the chart. A buy trade is entered.
In the third case, the CCI reaches the overbought levels of +, and a Pinbar emerges in the price chart. A sell position is opened.
In the fourth case, the CCI reaches level +, and a bearish engulfing pattern appears in the price chart. Again, a sell trade is entered.
A stop loss is always set according to the Price Action pattern rules. A take profit is set at a distance of three times longer than the stop loss. You can also set a take profit at a strong resistance (for a purchase) or support (for a sale) level. Another option to exit a trade is when the CCI indicator reaches level + or , depending on the trade direction (buy or sell).
Thus, based on the above example, one could make a profit from four trades entered based on the CCI signals to identify overbought and oversold areas.
As soon as the index crossed the 0 line from the bottom up, and the trading day closed the price with a gain, the market continued to grow.
I want to emphasize once again that a trader should identify the trend in longer timeframes (D1, W1) to trade based on the signals described above. The trend can be identified using general techniques, such as key highs and lows in the chart, or using other technical analysis tools.
An oscillator is not meant to define trends.
If you trade each situation when the CCI crosse level 0 upside or downside, you will face a situation when the market movement is rather limited, or a stop loss works out.
So, the average typical price on October 21 is From this value, you need to subtract the typical price on October 21st. - = To calculate the absolute deviation, we need to take the value modulo, i.e.,
Next, we subtract the typical price value for October 20 from the average typical price of October 21, - = -0, We take the absolute values, and here it is
Next, we subtract the typical price for October 19 from the average typical price of October 21, - = -0, We take the modulo value, as usual; it is
We do the same procedure for each trading day, including the very beginning of September 26,
When we have calculated the absolute deviation of the average typical price from the typical prices for each day, the values obtained separately must be added and divided by The result is the mean absolute deviation. I will not give the whole calculation and limit myself only to the final value -
Next, you need to scale the mean absolute deviation by multiplying it by the Lambert constant of , * =
Then you need to subtract from the typical price on October 21 the value of the average typical price for October - =
And at the last stage, we divide the value of by the scaled mean absolute deviation: / =
Thus, we got the CCI value at the close on October 21, , for the EUR/USD pair equal to To check, you can impose CCI on the price chart in the trading platform and see its value on October
As can be seen from the above example, the calculation of CCI is not complicated but requires numerous actions that are best left to a computer, indicators, and specialized software to quickly obtain the necessary information.
The CCI trading strategy is in many ways similar to strategies based on other oscillators. When working with CCI, a trader's attention is mainly focused on the indicator location relative to levels 0, , +, , and +
Traders like the CCI commodity channel index because it is a versatile indicator that is relatively easy to interpret. Both a beginner and a professional trader can profitably apply the CCI trading strategy, so I strongly recommend that you familiarize yourself with at least the basic strategies below, and then decide for yourself whether this style of trading suits you or not.
If we consider the basic signals to buy or sell sent by the CCI indicator, first of all, it should be noted that the indicator is an oscillator. Therefore, the tool itself does not provide any information about the global trend. If you trade each signal, you won’t add up to your initial investment much.
Hence the following idea arises: an additional tool is needed to determine the global trend in the market to minimize the number of unprofitable signals.
Other indicators, such as the Moving Average, can be used to define the trend. However, I believe it is best to stick to the Dow Theory and identify the trend using key highs and lows in the daily chart.
When you have an idea of the primary trend, trading with the CCI indicator won’t be difficult. Next, you should look at buy and sell signals provided by the CCI indicator, having identified the general trend in the market using key highs and lows in the price chart.
A signal to buy is sent when the indicator line crosses level 0 from the bottom up. At the same time, the general trend for the instrument should be up.
3. The dispersion is calculated. Differently put, this is the mean absolute deviation, which allows you to identify overbought or oversold conditions of the market.
The mean absolute deviation is the arithmetic average of the absolute deviation of a typical price from its moving average over n periods, calculated by the formula:
As you can see, most of the CCI values (according to Donald Lambert, 70 - 80%) stay within the limits of and + level lines. The rest 30 - 20% of the CCI values reach beyond the level lines indicating extremes. With CCI being an unbounded oscillator, these extreme values can continue to grow and are not supposed to reverse having crossed the level lines. Thus, the prices reaching beyond the level lines can signal both an emerging of a trend or its reversal. That's why CCI requires to be used in conjunction with additional technical analysis tools to confirm interpretation of its signals.
Note that CCI is used by many traders as a stand-alone oscillator providing trading signals on its own (read later in the article).
Please remember that the CCI oscillator uses the historical data for its calculation and all the information it provides belongs to the past. A trader can only suppose that the past tendencies will continue to develop in the same way for some time in the future and try to use the information appropriately.
To apply a CCI oscillator to a chart, a trader needs to follow the procedure common to all Marketscope indicators. For more information, see the Add Indicator article.
During the procedure, a trader can customize an oscillator by specifying its parameters in the Properties dialog box. For more information, see the Change Indicator Properties article.
The parameters fall into three groups:
The CCI oscillator has only one Calculation parameter - Number of periods. The parameter allows specifying the number of periods, over which the oscillator is to be calculated. The possible values are from 2 through 1, The default value is 14. The smaller the number is, the more sensitive the oscillator becomes. The greater the number is, the less sensitive the oscillator becomes. Traders choose the parameter's value in accordance with their need of the level of sensitivity of the oscillator. The recommended and most commonly used value is the default one - 14.
The CCI oscillator has the following Levels parameters:
Please note that you can specify the width, style, and color of the two lines by selecting the values of your choice under the same Levels heading.
Note also that the zero line is always black and its color cannot be modified.
On the following picture, you can see how CCI oscillators of different Number of periods values with level lines of different Overbought level and Oversold level values, colors, styles, and widths look like on a chart.
The parameters are available on the Parameters tab of the CCI Properties dialog box under the Calculation (Number of periods) and Levels (Overbought level and Oversold level) headings.
When a CCI oscillator is drawn on a chart, a trader can analyze its information and try to interpret it correctly. According to Donald Lambert, CCI produces trading signals only when the oscillator's line reaches either above the Overbought level line or below the Oversold level line. The main signals are:
On the following picture, you can see examples of the Divergence signals.
Please note that divergences are often misleading in a strong price trend: bullish (or bearish) divergences can occur in a strong downtrend (or uptrend) and yet the strong downtrend (or uptrend) continues.
The CCI oscillator's values are calculated automatically using the following formulas:
CCI = (Typical Price - period SMA of TP) / ( x Mean Deviation)
CCI = TP - MVAN / ( x MDN)
where:
CCI - is the Commodity Channel Index value of the period being calculated.
TP - is the Typical ((High + Low + Close)/3) price of the current period.
MVA - is the Simple Moving Average value of Typical prices of the current period calculated over N number of periods.
- is Lambert's constant (Lambert set the constant at to ensure that approximately 70 to 80 percent of CCI values would fall between the and + level lines.
MD - is the Mean Deviation of Typical prices of the current period calculated over N number of periods. To calculate the Mean Deviation, first, subtract the most recent N - period average of the Typical price from each period's Typical price. Second, take the absolute values of these numbers. Third, sum the absolute values. Fourth, divide by the total number of periods (N).
N - is the number of periods, over which the MVA and MD values are calculated (both are set by the Number of periods parameter).
Trying to predict the future price of securities, be it stocks, currencies, options, or commodity futures, is not an easy task. Investors look to fundamental analysis to try and gauge the actual value of a security; however, traders often turn to technical analysis to complement their research and help time their trades better. There are several types of technical indicators: trend, momentum, volume, volatility, and support/resistance. They are used to predict different markets and are each best suited to different circumstances. Few technical indicators are more suitable for predicting and timing volatile markets than the Commodity Channel Index indicator (CCI). In this article, we will take a look at how it is calculated, how to use it in forex trading, and provide a simple CCI indicator trading strategy to help improve your trading arsenal.
CCI calculation is relatively straightforward and involves several short steps. Here is the formula for the CCI indicator:
We can calculate the values of CCI in a 7-step process:
The constant is simply a statistical adjustment to make most of your CCI values fall between and
The indicator is usually portrayed at the bottom of your trading chart in most trading software, with two highlighted horizontal lines with values of and The CCI values over are often drawn in green (meaning overbought), whereas values below are usually in red (meaning oversold). Heres the CCI in action on a continuous Brent crude oil futures contract:
We have just learned how to calculate the CCI indicator; however, how do you apply it in your daily trading activity? What exactly does it mean, and how do you interpret it?
Despite its name, the CCI indicator can be used in any market, not only in commodities. Due to its nature, to produce the best results, it is best when used in markets that are somewhat volatile. Developed by Donald Lambert, this technical indicator assesses both the direction and the strength of the price trend and can be used to determine whether to enter or exit a trade.
The CCI indicator is composed of a single fluctuating curve. It is designed to make the majority (around 75%) of its values fall between and Therefore, anything above or below the boundaries (the remaining 25%) is considered abnormal and may constitute a buying or selling opportunity. That is especially the case if the CCI indicator has reached a value above or below (after having reached a below 0 or an above 0 level previously, respectively).
It is helpful to know that the CCI indicator has its limitations. It may occasionally provide late and, therefore, false signals called whipsaws where a rally above or a fall below may come too late, as the price rally/downturn has already run its course and begun to switch direction.
In addition, the CCI indicator is unbound. While other indicators such as the RSI have a clear range and cannot go above or below , the CCI can, and therefore, prior overbought or oversold levels may have little impact in the future.
As a result of these limitations, it is best to complement the CCI indicator with other oscillators to achieve the best performance. Also, keep in mind that since the indicator uses the past 20 price ranges as a reference, it is best to avoid trading in quiet market times even though the indicator is at a level of
As mentioned, the CCI indicator is an unbound indicator, meaning its values can go below and above Therefore, it is best to know which values are typical and which are abnormal in the market you are trading. For instance, in one market, a value of might constitute a viable buying opportunity, whereas in others, a value of is often a whipsaw, and only values starting at and above constitute a profitable buying opportunity in the long run. For this reason, it is crucial to analyse the market you are trading and to know the types of CCI levels that are profitable in the longer term. Back-testing or excel-modelling a specific strategy in a particular market are good ways of knowing profitable CCI levels and will be a crucial part of your CCI strategy.
Once you know your profitable CCI levels, you know your entry points. Unless you are trading on a very short time frame, and there is a piece of breaking news announced that might affect the price significantly in the opposite direction to the one in which you want to trade, you can enter a trade every time the CCI crosses that profitable level in an active market.
As far as sizing goes, it is best not to allocate more than % of your capital towards a single trade, as often, you are playing the probability game in trading. If you assign a significant amount of your capital to a single transaction, you risk losing a large chunk to whipsaws which would likely constitute a smaller part of your trades in the long run. Correct sizing is a major part of a traders risk management strategy.
Placing reasonable stop-loss levels is vital for profitable trading. While stop-loss levels depend on the volatility of the market at the time of trading and the timeframe you choose, in general, for this strategy, you may want a relatively modest stop-loss, with a reward to risk ratio above 1 (meaning your expected profit divided by your stop-loss should be above the value of 1). If the CCI indicator is correct, and the price is overbought or oversold, then the price has much more room to return from a substantial rise or fall than to rise or fall even further. This should be reflected in your stop-loss. Additionally, you can use a trailing stop to protect your profits.
Your exit strategy will also depend on the current volatility in the market. If volatility is high, you can expect prices to move much more than when it is low. As a rule of thumb, look at both the CCI indicator and the price level to determine the correct timing for an exit. Once the price and CCI start reverting (CCI starts moving towards 0), you may consider exiting the trade.
While you may not get every trade right, consistency is vital, and the CCI indicator will give you an edge in the long run, particularly when combined with other indicators.
Lets look at a couple of CCI indicator trades that illustrate using the strategy we have outlined in the previous section.
We will take a look at the continuous Brent Oil futures contract in a minute timeframe to pick out a few example trades. As we can see from the graph, we have found several profitable trading opportunities in a relatively short time span, with one clear whipsaw. Lets look at trades 4 and 5 and see how we could have traded them using our trading strategy.
Upon analysing the current market, we have selected a CCI level of or for all our entries. Trade number 4 falls under our radar, as we can see that the contract is highly overbought. As soon as CCI hits , we place a trade at , constituting 2% of our capital, with a trailing stop loss of (stops will differ depending on market volatility, expected return on the trade, the timeframe of your choice, and the market itself). The price climbs up a little, just to record a significant fall later. As the CCI indicator approaches a level of 0, we exit the trade at around for a profit of
Unfortunately, we dont capture the full scope of the fall using solely the CCI exit strategy. However, the market produces another opportunity as the CCI drops below We enter at , using 2% of our capital. In light of the increased market volatility and recent significant market moves, we increase our stop value and put a trailing stop loss of The market continues to fall close to , after switching directions and beginning to rise. As the CCI closes in on 0, we exit our trade at for a profit of While this was not as good a reward to risk ratio as the previous trade, a reward to risk ratio of /= is still okay.
In this article, we used IGs web trader to illustrate our trading strategy. If you are looking to get started in trading, several reputable brokers are available.
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In this article, we have learned how the CCI indicator is calculated and how to use it in trading. We have shared a viable trading strategy involving the CCI indicator and went on to show specific example trades you can use to learn how to handle this indicator and use it profitably in everyday trading. The CCI indicator is an additional powerful tool for those looking to trade volatile markets, and if you care about making a profit, it is not to be ignored.
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The market provides two trading signals to buy USCrude oil. The first one appears on April 14, ; the second one is on May 27,
When the trade is entered according to the first signal, the market doesn’t reach the take profit and starts a correction. The CCI indicator breaks through the zero level from top to bottom (marked with the blue line). In this situation, I recommend exiting the trade, even if there is a loss, as the conditions for holding the position are not met, and the indicator generates an opposite signal. One should not enter a sell trade at the close of the day, marked by the blue line, as the overall trend is up.
However, a few days later, on May 27, the Commodity Channel Index generates one more signal to buy; this time, it yields a profit.
The bearish signal is sent when the indicator line crosses the zero line downside. At the same time, the general strong trend should be down.
The time period to be used in calculating the SMA portion of the CCI (20 is the Default).
Determines what data from each bar will be used in calculations. Close is the default.
Can toggle the visibility of the CCI as well as the visibility of a price line showing the actual current price of the CCI. Can also select the CCI Line's color, line thickness and visual style (Line is the Default).
Can toggle the visibility of the Upper Band as well as select its value, color, line thickness and line style.
Can toggle the visibility of the Lower Band as well as select its value, color, line thickness and line style.
Toggles the visibility of a Background color within the Bands. Can also change the Color itself as well as the opacity.
Sets the number of decimal places to be left on the indicator's value before rounding up. The higher this number, the more decimal points will be on the indicator's value.
Litefinance" height="" src="eunic-brussels.eu?q=75&s=bc8b2e8cd3e31" width="">You see from the AUDUSD chart above that the trend is down. The price makes a local low (1), and then makes a lower low (2). The CCI, however, makes a low (1), and the next low is higher. There is a divergence between the price chart and the CC indicator, so the market is about to turn up.
A bullish divergence is a strong signal to enter a buy trade. The trade is opened after the Pinbar Price Action pattern appears, following the second low in the chart.
There is another example of divergence in the same chart. The price chart makes low (4), lower than the preceding one (3), while the CCI makes low (4), which is higher than the previous one (3). Here emerges the bullish divergence, a strong signal to buy in technical analysis.
You should attentively follow the extremes in the price charts and in the CCi chart. If the indicator chart and the price go in opposite directions, there is a bullish or bearish divergence. At this moment, you should try to spot a pattern to trade, according, for example, to the Price Action.
A stop loss is set based the pattern rules, according to which the position is opened. A take profit is set at the distance three times longer than the stop loss or at a strong support or resistance level, depending on whether it is a buy or a sell trade.
If you master trading bullish and bearish divergences CCI, you will enter more trades and raise the potential profitability of your trading account. Divergence signals are among the strongest ones generated by the CCI indicator.
The Commodity Channel Index indicator is also suitable for intraday trading, like most technical analysis tools. In this case, the trader should switch to the M5 or M15 timeframe. The shorter the timeframe, the more signals there will be. In a longer timeframe, there will be fewer signals, but they will be more reliable.
You can leave the indicator default period at 20 or choose your own value. Don't be afraid to experiment. For highly volatile instruments, a period with a greater value should be selected. For low volatility, the opposite is true.
For intraday trading, the same rules and strategies that I described above work. Watch the CCI location relative to level 0, overbought and oversold levels +, , bullish and bearish divergences. The main difference is that the position holding time will not be several days, but several hours. However, in day trading, there are more false signals. In short timeframes M1 - M15, there is more so-called market noise, so it is not always possible to determine the general trend for the instrument.
Let us explore a few examples of CCI day trading.
The Commodity Channel Index can be calculated using Microsoft Excel software. This type of calculation can be useful for those traders who trade on a platform that can’t add the CCI indicator to the chart.
This type of calculation can be useful for obtaining digital CCI values for each trading day. In the future, such digital CCI measures can be analyzed at your own discretion and used with another technical indicator reflecting the market state.
Below, you can find the template for the CCI calculation in Microsoft Excel.
Download the CCI template
On the first sheet of the template, called “Data”, the trader needs to specify the High, Low, and Close prices. For convenience, I recommend that you also fill in the “Date” and “Open” columns with the corresponding date of the trading day and the opening price.
Next, the program will calculate the Typical Price, the day Simple Moving Average of the Typical Price, the day Mean Absolute Deviation, and the CCI indicator itself using the abovementioned formulas.
If you need to calculate CCI reading for a period other than 20 days, then you can easily edit the template to your liking by reducing or adding the number of periods yourself.
The second sheet of the template, “Parameters”, will display the calculated CCI as a chart. Also, the closing price of the specified periods (days) will be imposed on the chart.
For convenience, you can fill in the “Parameters” table by entering the name of the analyzed instrument, the analysis period, and the CCI calculation time interval. In the future, the “Parameters” sheet can be printed.
Thus, you can have a ready-made tool for calculating CCI in Excel, which is not tied to the trading terminal and can be used depending on your objectives.
Let us try to calculate the commodity channel index for the EUR/USD instrument manually at the trading day close on October 21,
We need to know the high, low, and close of the last 20 trading days, including October 21st. That is, we need the data from September 26 to October 21, , as Forex trading is closed at weekends. To find out these prices, just open any trading terminal and hover the mouse over the day you are interested in, and the trading platform will show all the necessary information.
Next, we should calculate the typical price for each day separately. To do this, add the high price, the low price, and the closing price of the day and divide the resulting amount by 3.
After you have calculated the typical price for each day, let us find out the simple moving average of the typical price over the past 20 days. To do this, we need to calculate the arithmetic mean of the typical price values from September 26 to October 21 inclusive:
The next step is to determine the mean absolute deviation. However, first, you need to calculate the absolute deviation of the average typical price for the day for which we calculate the CCI indicator from the typical prices for each day used for calculation.
As you already know, the mean absolute deviation is calculated according to the formula:
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