Commodity Channel Index (CCI) - Uses, Calculation & Examples

04 February 2025
4 min read
Commodity Channel Index (CCI) - Uses, Calculation & Examples
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In intraday trading, traders use a variety of technical analysis tools, including charts, indicators and oscillators, to understand market supply and demand and investor psychology. Amongst these tools, momentum oscillators occupy a special place in a day trader's toolkit. These indicators show the movements of asset prices over time and the strength of such movements in helping make accurate predictions. 

The Commodity Channel Index (CCI) is one such momentum indicator used by many traders to assess price direction and trends. In this guide, you will learn how the CCI indicator works, its different uses, calculations and more. 

What is Commodity Channel Index (CCI) Indicator?

The Commodity Channel Index (CCI) indicator is a momentum oscillator used to identify new trends or extreme market conditions. Originally created by Donald Lambert in 1980, this indicator was initially used to identify cycles in the commodity market. Thereafter, traders began using the CCI indicator for different markets, including equities, indices, futures and options. 

CCI measures the difference between an asset’s current price and average historical price over a given period. Its value is high when the trading current price is far above the average price and low when the current price is far below the average price. In this way, the CCI indicator provides oversold and overbought signals. 

Traders use this technical indicator to understand price trends and direction. They use it to determine if they should enter or exit a trade, avoid a position or build up their exiting positions.

Interpretation of the Commodity Channel Index (CCI) Indicator

The CCI indicator is a versatile tool used for identifying overbought or oversold signals and spotting new trends and signs of upcoming bullish or bearish divergence. The CCI oscillates around a zero line, with a value ranging from -100 and +100; its value can go outside these ranges since the Commodity Channel Index is an unbound indicator. 

Here’s what the CCI indicator shows:

  • A large upswing of the CCI indicator from a negative or near-zero value to above 100 indicates that a new uptrend is starting. A high value and low movement can also indicate a potential downside reversal. 
  • On the other hand, when the CCI value falls below 100, it signals the start of a potential downtrend. Values below 100 can also indicate oversold conditions, signalling a potential upside reversal. 

Different Uses of the Commodity Channel Index

The CCI indicator has the following uses:

  • Identifying a New Trend: Large movements of the CCI oscillator indicate unusual strength or weakness in the market that foreshadows a significant price swing. Zero-line crossovers on the CCI can also be used to identify emerging trends.
  • Tracking Overbought Conditions: When the CCI moves above the +100 mark, the asset is likely overbought. This indicates that the asset price may be due for a pullback. If the CCI value is extremely high (e.g., +200 or +300), the likelihood of the downward reversal increases.
  • Tracking Oversold Conditions: An asset is likely oversold if its CCI indicator value goes below -100. This suggests that the asset price is due for a bounce. An extremely high CCI value indicates a very strong likelihood of a price increase.
  • Spotting Bullish and Bearish Divergences: If the asset price is constantly making new lows while its CCI value does not do the same, it indicates a possible bullish divergence. On the other hand, if the asset price makes new highs but CCI does not make such highs, it is a sign of a bearish divergence. The divergence is confirmed when the CCI value crosses a certain threshold. 

How to Calculate Commodity Channel Index?

To calculate the Commodity Channel Index, you need to determine the mean price of your chosen security and the average of the means over a chosen period. This difference is compared to the average difference over the period and multiplied by a constant to ensure a standard value. 

Here is the formula for the Commodity Channel Index for a 20-period CCI:

CCI = (AP – 20-period SMA of AP) / (0.15 x MD) 

Where, AP is the average of the high, low and closing price, SMA is the simple moving average, and MD is the mean division (average of absolute difference between AP and SMA over 20 periods.

A scaling factor of 0.15% is also used to ensure that most CCI values fall between -100 and +100. 

Here is an example showing how to use the Commodity Channel Index formula:

Suppose Stock A has a high, low and closing price of ₹70, ₹60 and ₹65, respectively, on the previous day. The average price will be ₹65 (70+60+65/3). If the previous day’s SMA is ₹75, the 20-day SMA will be ₹70 (65+75/2). Suppose the mean deviation is 2.4. 

In this example, the Commodity Channel Index (CCI) of Stock A can be calculated as follows:

CCI = (65 – 70)/(0.15 x 2.4) = -13.88

The Bottom Line 

The Commodity Channel Index is a multipurpose technical analysis tool that traders can use to identify oversold/overbought signals, divergences and emerging trends. Since it is an unbound indicator, it can show more details regarding price trends and volumes. Despite its name, you can use it to study any type of market-linked asset, including stocks, F&O, commodities, currencies, etc.

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