Commodity Channel Index (CCI)

Type

Momentum closing price compared to Moving Average

History

Developed by Donald Lambert, the Commodity channel index was designed to identify cyclical turns in commodities.

How does it work?

The CCI measures the variation of a security's price from its statistical mean. High values of CCI usually indicate that prices are unusually high compared to average prices. While low values indicate that prices are unusually low.

Although CCI was originally developed for trading commodities, the CCI index can be used effectively on any type of security.

Trading Signals

There are two methods of interpreting the CCI: looking for divergences and as an overbought/oversold indicator.

        A divergence occurs when the security's prices are making new highs while the CCI is failing to surpass its previous highs. This divergence is usually followed by a correction in the security's price.        The CCI typically oscillates between 100. To use the CCI as an overbought/oversold indicator, readings above +100 imply an overbought condition. Readings below -100 imply an oversold condition.

Settings

Sharechart Default:  10 period, 15 period, 20 period

Example

The chart below is of Australian Worldwide Exploration Limited. Using the CCI indicator we can determine oversold and overbought areas. Note in September and October there was 2 divergences from the share price and the CCI and the share price then turned to the opposite direction.

The setting for the CCI indicator for the graph above was 13 periods, as shown below. It can be modified by going to Settings > Indicators > CCI. Note you can use multiple periods.